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What changed in Penguin Solutions, Inc.'s 10-K — 2022 vs 2023

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Paragraph-level year-over-year comparison of Penguin Solutions, Inc.'s 2022 and 2023 10-K annual filings, covering the Business, Risk Factors, Legal Proceedings, Cybersecurity, MD&A and Market Risk sections. Every new, removed and edited paragraph is highlighted side-by-side so you can see exactly what management changed in the 2023 report.

+380 added−294 removedSource: 10-K (2023-10-20) vs 10-K (2022-10-14)

Top changes in Penguin Solutions, Inc.'s 2023 10-K

380 paragraphs added · 294 removed · 242 edited across 5 sections

Item 1A. Risk Factors

Risk Factors — what could go wrong, per management

157 edited+98 added−19 removed238 unchanged
Biggest changeRisks Related to Our Business • The effects of the COVID-19 outbreak could adversely affect our business, results of operations and financial condition. • Our efforts to adapt to our work environment to the COVID-19 pandemic may be unsuccessful. • Changing worldwide economic conditions could adversely affect our operating results and financial condition. • Our operating results fluctuate from quarter to quarter, which make them difficult to predict. • We have experienced losses in the past and may experience losses in the future. • We compete in historically cyclical markets. • Volatility in average selling prices may have an adverse effect on our business, results of operations and financial condition. • Tariffs or other trade restrictions or taxes could have an adverse impact on our operations. • We depend on a select number of customers for a significant portion of our revenue. • The markets that we serve are highly competitive. • We may be unable to optimally match purchasing and production to customer demand, which may have a material adverse effect on our business, results of operations and financial condition. • Our future success depends on our ability to develop new products and services. • Our customers often require that our products undergo a lengthy and expensive process of evaluation and qualification without any assurance of net sales. • If our OEM customers decide to utilize standardized solutions instead of our specialty products, our net sales and market share may decline. • We depend on a small number of sole or limited source suppliers. • We may be unable to adapt to technological change. • We may not be able to maintain or improve our manufacturing efficiency. • Disruption of our operations at any one of our manufacturing facilities would substantially harm our business. • We are subject to a number of procurement laws and regulations. • Contracts with the United States Government may be terminated, cancelled or modified. • Products that fail to meet specifications, are defective or that are otherwise incompatible with end uses could impose significant costs on us. • Breaches of our security systems, or those of our customers, suppliers or business partners, could expose us to losses. • Some of our offerings utilize open source software, which may pose particular risks to our proprietary software, products and services in a manner that could harm our business. • Open source software may make it easier for competitors, some of which may have greater resources than we have, to enter our markets and compete with us. • We could be prevented from selling or developing our software if our licenses are not enforceable or are modified so as to become incompatible with other open source licenses. • Our indemnification obligations to our customers and suppliers could require us to pay substantial damages. • We may need to raise additional funds, which may not be available on acceptable terms or at all. 15 • We may make future acquisitions and/or alliances, which involve numerous risks. • We may fail to realize the anticipated benefits of recent acquisitions. • We rely on third parties to sell a portion of our products and services. • We may be unable to protect our intellectual property. • Legal proceedings and claims could have a material adverse effect on our business, results of operations or financial condition. • We may be required to pay royalties or obtain licenses to sell certain products. • Changes in tax laws or potential adjustments by tax authorities in key jurisdictions could materially increase our tax expense. • Our ability to use our net operating loss carryforwards is limited. • We could incur substantial costs or liabilities as a result of violations of environmental laws. • Our worldwide operations, and those of our suppliers, business partners and customers, may be disrupted by events outside of our control, including the effects of climate change, natural disasters, man made disasters or other events, as well as societal and governmental responses to such events. • Hostilities in Ukraine may exacerbate certain risks we face.
Biggest changeRisks Related to Our Business • Changing worldwide economic conditions could adversely affect our operating results and financial condition. • Our operating results fluctuate from quarter to quarter, which make them difficult to predict. • We have experienced losses in the past and may experience losses in the future. • We compete in historically cyclical markets. • Fluctuations in average selling prices may have a material adverse effect on our business, results of operations and financial condition. • Tariffs or other trade restrictions or taxes have had in the past, and could have in the future, an adverse impact on our operations. • We depend on a select number of customers for a significant portion of our revenue. • The markets that we serve are highly competitive. • We may be unable to optimally match purchasing and production to customer demand, which may have a material adverse effect on our business, results of operations and financial condition. • Our future success depends on our ability to develop new products and services. • Our customers often require that our products undergo a lengthy and expensive process of evaluation and qualification without any assurance of net sales. • If our OEM customers decide to utilize standardized solutions instead of our specialty products, our net sales and market share may decline. • We depend on a small number of sole or limited source suppliers. • We may be unable to adapt to technological change or maintain or improve our manufacturing efficiency. • Disruption of our operations at any one of our manufacturing facilities would substantially harm our business. • We are subject to a number of procurement laws and regulations. • Contracts with the United States Government may be terminated, cancelled or modified. • Products that fail to meet specifications, are defective or that are otherwise incompatible with end uses could impose significant costs on us. • Actual or perceived breaches of our security systems, or those of our customers, suppliers or business partners, could expose us to losses. • Some of our offerings utilize open source software, which may pose particular risks to our proprietary software, products and services in a manner that could harm our business or make it easier for competitors to enter our markets and compete with us. • We could be prevented from selling or developing our software if our licenses are not enforceable or are modified so as to become incompatible with other open source licenses. • Our indemnification obligations to our customers and suppliers could require us to pay substantial damages. • We may need to raise additional funds, which may not be available on acceptable terms or at all. • We may make future acquisitions and/or alliances, which involve numerous risks. 15 • We may fail to realize the anticipated benefits of recent acquisitions or the sale of our SMART Brazil business. • We have incurred, and may in the future incur, impairment charges related to our goodwill, which could have a material adverse effect on our business, results of operations and financial condition. • The planned divestiture of the SMART Brazil business is subject to a number of conditions beyond our control.
For example, if our supply or customer arrangements are disrupted due to expanded sanctions, involvement of countries where we have operations or relationships or rising energy prices, our business could be materially disrupted.
For example, if our supply or customer arrangements are disrupted due to sanctions or expanded sanctions, involvement of countries where we have operations or relationships or rising energy prices, our business could be materially disrupted.
Such risks include, among others: • problems integrating the purchased operations, technologies, products or personnel; • unanticipated costs or expenses associated with an acquisition or investment, including write-offs of tangible assets as well as goodwill or other intangible assets; • negative effects on profitability resulting from an acquisition or investment; • adverse effects on existing business relationships with suppliers and customers; 27 • the risk that suppliers (such as Wolfspeed, Inc.) or customers of an acquired business are unable or unwilling to do business with us following the acquisition; • risks associated with entering markets in which we have little or no prior experience, such as the market for LED products that we entered following our acquisition of Cree’s LED Business and markets with complex government regulations; • loss of key employees of the acquired business; and • litigation arising from an acquired company’s operations.
Such risks include, among others: • problems integrating the purchased operations, technologies, products or personnel; • unanticipated costs or expenses associated with an acquisition or investment, including write-offs of tangible assets as well as goodwill or other intangible assets; • negative effects on profitability resulting from an acquisition or investment; • adverse effects on existing business relationships with suppliers and customers; • the risk that suppliers (such as Wolfspeed, Inc.) or customers of an acquired business are unable or unwilling to do business with us following the acquisition; • risks associated with entering markets in which we have little or no prior experience, such as the market for LED products that we entered following our acquisition of Cree’s LED Business and markets with complex government regulations; • loss of key employees of the acquired business; and • litigation arising from an acquired company’s operations.
We are unable to accurately predict the impact that COVID-19 will have in future periods due to 17 various uncertainties and future developments, including the evolution and severity of the disease, the occurrence of other epidemics, the imposition of related public health measures and travel and business restrictions or other actions that may be taken by governmental authorities in an effort to contain or treat the virus, all of which, together with the disruptions and other factors discussed above, could have a material adverse effect on our customer relationships, operating results, cash flows and financial condition and have a negative impact on our share price.
We are unable to accurately predict the impact that COVID-19 will have in future periods due to various uncertainties and future developments, including the evolution and severity of the disease, the occurrence of other epidemics, the imposition of related public health measures and travel and business restrictions or other actions that may be taken by governmental authorities in an effort to contain or treat the virus, all of which, together with the disruptions and other factors discussed above, could have a material adverse effect on our customer relationships, operating results, cash flows and financial condition and have a negative impact on our share price.
If our assumptions about, or interpretation or implementation of, tax and other laws are incorrect; if tax laws or regulations are substantially modified or rescinded; if the tax incentives from which we benefit in the jurisdictions in which we operate, including the PPB/IT Program, PADIS and Lei do Bem in Brazil, are substantially modified or rescinded; if we fail to meet the conditions of any of the tax incentives; or if we do not prevail in disputes with tax authorities, we could suffer material adverse tax and other financial consequences including owing significant amounts of taxes and penalties that would increase our expenses, reduce our profitability and adversely affect our cash flows, results of operations and financial condition.
If our assumptions about, or interpretation or implementation of, tax and other laws are incorrect; if tax laws or regulations are substantially modified or rescinded; if the tax incentives from which we benefit in the jurisdictions in which we operate, including the PPB/IT Program, PADIS and Lei do Bem in Brazil, are 37 substantially modified or rescinded; if we fail to meet the conditions of any of the tax incentives; or if we do not prevail in disputes with tax authorities, we could suffer material adverse tax and other financial consequences including owing significant amounts of taxes and penalties that would increase our expenses, reduce our profitability and adversely affect our cash flows, results of operations and financial condition.
A failure to develop products with required feature sets or performance standards, or delays in the development, introduction and qualification of new products or services, could significantly reduce our return on investment as well as our net sales, provide a competitor a first-to-market advantage and allow a competitor to achieve greater market share, or cause our customers to cancel their orders (generally without penalty), all of which would have a material adverse effect on our business, results of operations and financial condition.
A failure to develop products with required feature sets or performance standards, or delays in the development, introduction and qualification of new products or services, could significantly reduce our return on investment as well as our net sales, provide a competitor a first-to-market advantage and 20 allow a competitor to achieve greater market share, or cause our customers to cancel their orders (generally without penalty), all of which would have a material adverse effect on our business, results of operations and financial condition.
The adoption and expansion of trade restrictions and tariffs, quotas and embargoes, the occurrence of a trade 19 war or other governmental action related to tariffs or trade agreements or policies, has the potential to adversely impact demand for our products, our costs, our customers, our suppliers and the world and U.S. economies, which in turn could have a material adverse effect on our business, operating results and financial condition.
The adoption and expansion of trade restrictions and tariffs, quotas and embargoes, the occurrence of a trade war or other governmental action related to tariffs or trade agreements or policies, has the potential to adversely impact demand for our products, our costs, our customers, our suppliers and the world and U.S. economies, which in turn could have a material adverse effect on our business, operating results and financial condition.
If we are unable to supply certain products at competitive prices due to royalty payments we are required to make or at all because we were unable to secure a required 29 license, our customers might make claims against us, cancel orders or seek other suppliers to replace us, all of which could have a material adverse effect on our business, results of operations and financial condition.
If we are unable to supply certain products at competitive prices due to royalty payments we are required to make or at all because we were unable to secure a required license, our customers might make claims against us, cancel orders or seek other suppliers to replace us, all of which could have a material adverse effect on our business, results of operations and financial condition.
Moreover, as we continue to expend substantial funds for research and development projects, enhancements to sales and marketing 18 efforts, integration of acquisitions and to otherwise operate our business, we cannot assure you that we will achieve or maintain profitability on an annual or quarterly basis even if our revenue does grow. We compete in historically cyclical markets.
Moreover, as we continue to expend substantial funds for research and development projects, enhancements to sales and marketing efforts, integration of acquisitions and to otherwise operate our business, we cannot assure you that we will achieve or maintain profitability on an annual or quarterly basis even if our revenue does grow. We compete in historically cyclical markets.
Any of these risks could be difficult to eliminate or manage and, if not addressed, could have a material adverse effect on our business, financial condition and results of operations. Open source software may make it easier for competitors, some of which may have greater resources than we have, to enter our markets and compete with us.
Any of these risks could be difficult to eliminate or manage and, if not addressed, could have a material adverse effect on our business, financial condition and results of operations. 25 Open source software may make it easier for competitors, some of which may have greater resources than we have, to enter our markets and compete with us.
While we did not cause the contamination, we may be held responsible if remediation is required, although we may be entitled to seek indemnification from responsible parties under Brazilian law and from our lessor under our lease. In addition, as part of the acquisition of Cree’s LED business, we acquired facilities in China, which could present similar issues.
While we did not cause the contamination, we may be held responsible if remediation is required, although we may be entitled to seek indemnification from responsible parties under Brazilian law and from our lessor under our lease. In addition, as part of the acquisition of 33 Cree’s LED business, we acquired facilities in China, which could present similar issues.
Uncertainty in global economic and political conditions poses a risk to the overall economy, as consumers and businesses have made it difficult for customers, suppliers and us to accurately forecast and plan future business activities. Declines in the worldwide semiconductor market, economic conditions or consumer confidence would likely decrease the overall demand for our products.
Uncertainty in global economic and political conditions poses a risk to the overall economy, as consumers and businesses have made it difficult for customers, suppliers and us to accurately forecast and plan future business activities. Declines in 43 the worldwide semiconductor market, economic conditions or consumer confidence would likely decrease the overall demand for our products.
Our operating results in any given quarter can be influenced by numerous factors, many of which we are unable to predict or are outside of our control, including: • the loss of, significant reduction in sales to, or demand from, one or more key customers; • the acquisition of other companies or technologies, the failure to successfully integrate and operate them, or customers’ or suppliers’ negative reactions to them; • a disruption in, or termination of, our supply relationship with one or more key suppliers; • supply shortages that may impact our ability to manufacture products for our customers and may result in rising prices of the materials we need to manufacture our products; • our failure to develop new or enhanced products and introduce them in a timely manner; • the timing of our entry into new contracts; and • other factors described in this “Risk Factors” section.
Our operating results in any given quarter can be and have been influenced by numerous factors, many of which we are unable to predict or are outside of our control, including: • the loss of, significant reduction in sales to, or demand from, one or more key customers; • the acquisition of other companies or technologies, the failure to successfully integrate and operate them, or customers’ or suppliers’ negative reactions to them; • a disruption in, or termination of, our supply relationship with one or more key suppliers; • supply shortages that may impact our ability to manufacture products for our customers and may result in rising prices of the materials we need to manufacture our products; • our failure to develop new or enhanced products and introduce them in a timely manner; • the timing of our entry into new contracts; and • other factors described in this “Risk Factors” section.
At the same time, we also believe that certain of our employees have benefited from the ability to work remotely and may be resistant to calls to return to work. To the extent plans we adopt are more restrictive than those of others in our industry, our ability to attract and retain talent may be materially and adversely affected.
At the same time, we also believe that certain of our employees have benefited from the ability to work remotely and may be resistant to calls to return to work. To the extent plans we adopt are more restrictive than those of others in our industry, our ability to attract and retain talent may be materially and adversely 35 affected.
In general, an “ownership change” will occur if there is a cumulative change in our ownership by certain “5-percent shareholders” (including groups of shareholders) that exceeds 50 percentage points over a rolling three-year period. Similar rules may apply under state tax laws.
In general, an “ownership change” will occur if there is a cumulative change in our ownership by certain “5-percent shareholders” (including groups of shareholders) that exceeds 50 percentage points (by value) over a rolling three-year period. Similar rules may apply under state tax laws.
Our competitors may also be able to devote greater resources to the development, promotion and sale of products, and may be able to deliver competitive products at a lower price than we can. In addition to competing with certain portions of our product offerings, certain of our competitors are also our significant customers, suppliers, or both.
Our competitors may also be able to devote greater resources to the development, promotion and sale of products and may be able to deliver competitive products at a lower price than we can. In addition to competing with 19 certain portions of our product offerings, certain of our competitors are also our significant customers, suppliers, or both.
With respect to a portion of our business, we must comply with and are affected by laws and regulations relating to the award, administration and performance of government contracts in the United States and other countries. Government 23 contract laws and regulations affect how we do business with our customers and impose certain risks and costs on our business.
With respect to a portion of our business, we must comply with and are affected by laws and regulations relating to the award, administration and performance of government contracts in the United States and other countries. Government contract laws and regulations affect how we do business with our customers and impose certain risks and costs on our business.
Our products, services and systems may be used in critical company, customer, government or other third-party operations, or involve the storage, processing and transmission of sensitive data, including valuable intellectual property, classified information, other proprietary or confidential data, regulated data and personal information of employees, 24 customers and others.
Our products, services and systems may be used in critical company, customer, government or other third-party operations, or involve the storage, processing and transmission of sensitive data, including valuable intellectual property, classified information, other proprietary or confidential data, regulated data and personal information of employees, customers and others.
The failure to comply with any of these covenants would cause a default under the relevant credit agreement. A default, if not waived, could result in acceleration of the outstanding indebtedness under the Amended Credit Facility as well as under the 2026 Notes, in which case such indebtedness would become immediately due and payable.
The failure to comply with any of these covenants would cause a default under the relevant credit agreement. A default, if not waived, could result in acceleration of the outstanding indebtedness under the Amended Credit Agreement as well as under the 2026 Notes, in which case such indebtedness would become immediately due and payable.
Generally, our customers are not obligated to purchase our products even if we achieve a design win. If we 21 are unable to achieve design wins or if our customers’ systems incorporating our products are not commercially successful, it could have a material adverse effect on our business, results of operations and financial condition.
Generally, our customers are not obligated to purchase our products even if we achieve a design win. If we are unable to achieve design wins or if our customers’ systems incorporating our products are not commercially successful, it could have a material adverse effect on our business, results of operations and financial condition.
Inflation and some of the measures taken by governments in response to inflation can have significant negative effects on the economy generally. If Brazil or other countries where we operate experience substantial inflation or deflation in the future, our business may be adversely affected.
Inflation and some of the measures taken by governments in response to inflation can have significant negative effects on the economy generally. If Brazil or other countries where we operate experience substantial inflation or deflation in the future, our business may be materially adversely affected.
The markets in which we operate have in the past experienced, and are currently and may in the future experience, shortages in certain materials, including certain critical components, we use in manufacturing our products. These shortages cause some suppliers to place their customers, including us, on supply allocation.
The markets in which we operate have in the past experienced, and are currently experiencing and may in the future experience, shortages in certain materials, including certain critical components, we use in manufacturing our products. These shortages cause some suppliers to place their customers, including us, on supply allocation.
These third-party open source providers could experience service outages, data loss, privacy breaches, cyberattacks, ransomware and other events relating to the applications and services they provide that could diminish the utility of these 25 services, which could harm our business as a result.
These third-party open source providers could experience service outages, data loss, privacy breaches, cyberattacks, ransomware and other events relating to the applications and services they provide that could diminish the utility of these services, which could harm our business as a result.
Any rights we may have to specific performance, or to seek an injunction under Chinese law, in either of these cases, may be limited, and without a means of 34 recourse by virtue of the Chinese legal system, we may be unable to prevent these situations from occurring.
Any rights we may have to specific performance, or to seek an injunction under Chinese law, in either of these cases, may be limited, and without a means of recourse by virtue of the Chinese legal system, we may be unable to prevent these situations from occurring.
Our future performance may also depend, in part, on our ability to attract and retain additional third-party sales representatives and distributors that will be 28 able to market and support our products effectively, especially in markets in which we have not previously sold our products.
Our future performance may also depend, in part, on our ability to attract and retain additional third-party sales representatives and distributors that will be able to market and support our products effectively, especially in markets in which we have not previously sold our products.
The occurrence of any of the foregoing could result in unexpected expenses or require us to recognize an impairment of our assets, which would reduce the value of our assets and increase our expenses. We may be required to pay royalties or obtain licenses to sell certain products.
The occurrence of any of the foregoing could result in unexpected expenses or require us to recognize an impairment of our assets, which would reduce the value of our assets and increase our expenses. 31 We may be required to pay royalties or obtain licenses to sell certain products.
In addition, a prolonged economic downturn in Brazil, even absent a worldwide economic downturn, may lead to higher interest rates or significant changes in currency exchange rates, the rate of inflation in Brazil or an inability of our Brazil customers and suppliers to access capital on acceptable terms.
In addition, a prolonged economic downturn in Brazil, even absent a worldwide economic downturn, may lead to higher interest rates or significant changes in currency exchange rates, the rate of inflation in Brazil or an inability of our Brazil customers and suppliers to access capital on acceptable 36 terms.
As a result, our business is and will continue to be subject to the risks generally associated with international business operations in Brazil, Malaysia, China, Taiwan, India and other foreign countries, including: • compliance with numerous changing, and sometimes conflicting legal regimes on matters as diverse as tax, anticorruption, import/export controls and quotas, local manufacturing requirements, trade restrictions, tariffs, 31 taxation, sanctions, immigration, internal and disclosure control obligations, securities regulation, anti-competition, data privacy, employment regulations and labor relations; • changes in social, political and economic conditions; • transportation delays; • power and other utility shutdowns or shortages; • limitations on foreign investment; • disruptions in or lack of adequate infrastructure; • challenges protecting intellectual property and trade secrets; • exchange or currency controls and fluctuations, restrictions on currency convertibility and volatility of foreign exchange markets; • increased trade wars; • corruption or adverse political situations; • governmental intervention in local economies, industries, or the operations of specific companies, including us or our competitors; • changes or instability in local labor conditions, including strikes, work stoppages, protests and changes in employment regulations, increases in wages and the conditions of collective bargaining agreements; • compliance with travel restrictions, stay-at-home or work location conditions or other government or voluntary restrictions relating to the COVID-19 pandemic; • difficulties recruiting, employing and retaining qualified personnel to manage and oversee our local operations, sales and other activities; • difficulties in managing and overseeing employees and operations in locations far from senior management, which could result in compliance, control or other issues; • difficulties in obtaining governmental approvals and extension of existing incentives; • difficulties in collecting accounts receivable; • expropriation and nationalization of our assets in a particular jurisdiction; and • restrictions, or increases in existing tax rates, on repatriation of cash, dividends or profits.
As a result, our business is and will continue to be subject to the risks generally associated with international business operations in Brazil, Malaysia, China, Taiwan, India and other foreign countries, including: • compliance with numerous changing, and sometimes conflicting legal regimes on matters as diverse as tax, anticorruption, import/export controls and quotas, local manufacturing requirements, trade restrictions, tariffs, taxation, sanctions, immigration, internal and disclosure control obligations, securities regulation, anti-competition, data privacy, employment regulations and labor relations, and labor and human rights laws and expectations; • changes in social, political and economic conditions; • transportation delays; • power and other utility shutdowns or shortages; • limitations on foreign investment; • disruptions in or lack of adequate infrastructure; • challenges protecting intellectual property and trade secrets; • exchange or currency controls and fluctuations, restrictions on currency convertibility and volatility of foreign exchange markets; • increased trade wars; • corruption or adverse political situations; • governmental intervention in local economies, industries, or the operations of specific companies, including us or our competitors; • changes or instability in local labor conditions, including strikes, work stoppages, protests and changes in employment regulations, increases in wages and the conditions of collective bargaining agreements; • compliance with travel restrictions, stay-at-home or work location conditions or other government or voluntary restrictions relating to the COVID-19 pandemic; • difficulties recruiting, employing and retaining qualified personnel to manage and oversee our local operations, sales and other activities; • difficulties in managing and overseeing employees and operations in locations far from senior management, which could result in compliance, control or other issues; • difficulties in obtaining governmental approvals and extension of existing incentives; • difficulties in collecting accounts receivable; • expropriation and nationalization of our assets in a particular jurisdiction; and • restrictions, or increases in existing tax rates, on repatriation of cash, dividends or profits.
We maintain insurance to protect against certain claims associated with the use of our products; however, our insurance may not cover all or any part of a claim asserted against us. Our insurance does not cover intellectual property infringement in most instances.
We maintain insurance to protect against certain claims associated with the use of our 26 products; however, our insurance may not cover all or any part of a claim asserted against us. Our insurance does not cover intellectual property infringement in most instances.
For instance, the covenants in our Amended Credit Facility limit the ability of the applicable loan subsidiaries to, among other things: • incur additional indebtedness; • create liens on assets; • engage in mergers or consolidations; • sell assets; • pay dividends, make distributions or repurchase capital stock; • make investments, loans or advances; • repay or repurchase certain subordinated debt (except as scheduled or at maturity); • create restrictions on the payment of dividends or other amounts to us from our restricted subsidiaries; • make certain acquisitions; • engage in certain transactions with affiliates; and • amend material agreements governing our subordinated debt and fundamentally change our business.
For instance, the covenants in our Amended Credit Agreement limit the ability of the applicable loan subsidiaries to, among other things: • incur additional indebtedness; • create liens on assets; • engage in mergers or consolidations; • sell assets; • pay dividends, make distributions or repurchase capital stock; • make investments, loans or advances; • repay or repurchase certain subordinated debt (except as scheduled or at maturity); • create restrictions on the payment of dividends or other amounts to us from our restricted subsidiaries; • make certain acquisitions; • engage in certain transactions with affiliates; and • amend material agreements governing our subordinated debt and fundamentally change our business.
In addition, responding to 40 any litigation or action would likely result in a significant diversion of management’s attention and resources and a significant increase in professional fees. Our success depends on our ability to attract, retain and motivate highly skilled employees.
In addition, responding to any litigation or action would likely result in a significant diversion of management’s attention and resources and a significant increase in professional fees. Our success depends on our ability to attract, retain and motivate highly skilled employees.
In that event, the market price of our ordinary shares would likely decline. In addition, the market price of our ordinary shares may fluctuate or decline regardless of our operating performance. We have experienced losses in the past and may experience losses in the future. Our business has in the past experienced quarterly and annual operating losses.
In that event, the market price of our ordinary shares would likely decline. In addition, the market price of our ordinary shares may fluctuate or decline regardless of our operating performance. 17 We have experienced losses in the past and may experience losses in the future. Our business has experienced quarterly and annual operating losses.
In addition, many of our customers rely heavily on international trade. The imposition of tariffs, duties, border adjustment taxes or other trade restrictions by the United States could also result in the adoption of new or increased tariffs or other trade restrictions by other countries.
In addition, many of our customers rely heavily on international trade. The imposition of tariffs, duties, border 18 adjustment taxes or other trade restrictions by the United States could also result in the adoption of new or increased tariffs or other trade restrictions by other countries.
We also have costs and expenses that are denominated in foreign currencies, and decreases in the value of the U.S. dollar could result in increases in such costs that could have a 33 significant negative impact on our results of operations.
We also have costs and expenses that are denominated in foreign currencies, and decreases in the value of the U.S. dollar could result in increases in such costs that could have a significant negative impact on our results of operations.
Developments or economic conditions in other emerging market countries have at times significantly affected the availability of credit to the Brazil economy and resulted in considerable outflows of funds from Brazil and decreases in the amount of foreign investments in Brazil.
Developments or economic conditions in other emerging market countries have at times significantly affected the availability of credit to the Brazil economy and resulted in considerable outflows of funds from 38 Brazil and decreases in the amount of foreign investments in Brazil.
We could face claims from third parties claiming ownership of, or demanding release of, the open source software or derivative works that we developed using such software, which could further implicate aspects of our proprietary code.
We could face claims from third parties claiming ownership of, or demanding release of, the open source software or derivative works that we developed using such software, which could implicate aspects of our proprietary code.
High rates of inflation in the future would adversely affect our business, results of operations and financial condition. In the past, Brazil has experienced extremely high rates of inflation, and in the future, we may experience substantial inflation or deflation in Brazil or elsewhere.
High rates of inflation in the future would materially adversely affect our business, results of operations and financial condition. In the past, Brazil has experienced extremely high rates of inflation, and in the future, we may experience substantial inflation or deflation in Brazil or elsewhere.
For net operating loss carryforwards arising in tax years beginning after December 31, 2017, the Tax Act limits a taxpayer’s ability to utilize such carryforwards to 80% of taxable income.
For net operating loss carryforwards arising in tax years beginning after December 31, 2017, the Tax Act limits a taxpayer’s ability to utilize such carryforwards to 80% of taxable income in tax years beginning after December 31, 2020.
In addition, the Capped Call counterparties and/or their respective affiliates may modify their hedge positions by entering into or unwinding various derivatives with respect to our ordinary shares and/or purchasing or selling our ordinary shares or other securities of ours in secondary market transactions prior to the maturity of the 2026 Notes (and are likely to do so during any Observation Period (as defined in the Indenture) related to a conversion of 2026 Notes).
In addition, the Capped Call counterparties and/or their respective affiliates may modify their hedge positions by entering into or unwinding various derivatives with respect to our ordinary shares and/or purchasing or selling our ordinary shares or other securities of ours in secondary market transactions and prior to the maturity of the Convertible Notes (and are likely to do so during any Observation Period (as defined in the Indenture) related to a conversion of Convertible Notes).
Our future effective tax rates could be unfavorably affected by the resolution of issues arising from tax audits with various tax authorities in the United States and abroad; adjustments to income taxes upon finalization of various tax returns; increases in expenses not deductible for tax purposes, including write-offs of acquired in-process research and development and impairments of goodwill in connection with acquisitions; changes in available tax credits; changes in tax laws or regulations or tax rates; changes in the interpretation or application of tax laws; increases or decreases in the amount of net sales or earnings in countries with particularly high or low statutory tax rates; changes in exemptions from taxes in certain jurisdictions or in connection with certain transactions; or by changes in the valuation of our deferred tax assets and liabilities.
Our future effective tax rates could be unfavorably affected by the resolution of issues arising from a variety of sources, including: tax audits with various tax authorities in the United States and abroad; adjustments to income taxes upon finalization of various tax returns; increases in expenses not deductible for tax purposes, including write-offs of acquired in-process research and development and impairments of goodwill in connection with acquisitions; changes in available tax credits; changes in tax laws or regulations or tax rates; changes in the interpretation or application of tax laws; increases or decreases in the amount of net sales or earnings in countries with particularly high or low statutory tax rates; changes in exemptions from taxes in certain jurisdictions or in connection with certain transactions; or changes in the valuation of our deferred tax assets and liabilities.
If product demand increases more or faster than anticipated, we may not be able to add 39 manufacturing or assembly and test capacity fast enough to meet market demand.
If product demand increases more or faster than anticipated, we may not be able to add manufacturing or assembly and test capacity fast enough to meet market demand.
Volatility of currencies in countries where we conduct business, most notably the U.S. dollar, Chinese renminbi, Brazilian real, Malaysian ringgit, Japanese yen, Euro, British pound, South Korean won, New Taiwan dollar, Hong Kong dollar and Indian rupee have had and may in the future have an effect on our liquidity and operating results.
Volatility of currencies in countries where we conduct business, most notably the U.S. dollar, Chinese renminbi, Brazilian real, Malaysian ringgit, Japanese yen, Euro, British pound, South Korean won, New Taiwan dollar, Hong Kong dollar, Indian rupee and South African rand have had and may in the future have an effect on our liquidity and operating results.
Any of these activities could adversely affect the trading price of our ordinary shares or the 2026 Notes. Risks Related to Investments in Cayman Islands Companies We are a Cayman Islands company and, because the rights of shareholders under Cayman Islands law differ from those under U.S. law, shareholders may have difficulty protecting their shareholder rights.
Any of these activities could adversely affect the trading price of our ordinary shares or the Convertible Notes. Risks Related to Investments in Cayman Islands Companies We are a Cayman Islands company and, because the rights of shareholders under Cayman Islands law differ from those under U.S. law, shareholders may have difficulty protecting their shareholder rights.
Other factors that could cause demand for our products to fluctuate include: • a downturn in the computing, networking, communications, storage, aerospace, government, mobile or industrial markets; • changes in consumer confidence caused by changes in market conditions, including changes in the credit markets, expectations for employment and inflation and energy prices; • changes in the level of customers’ components inventory; • competitive pressures, including pricing pressures, from companies that have competing products, architectures, manufacturing technologies and marketing programs; • changes in technology or customer product needs; • strategic actions taken by our competitors; • market acceptance of our products; • changes in prevailing or available interest rates or liquidity of the domestic capital and lending markets; • exchange rates and currency controls and restrictions on the movement of capital out of country; • inflation; and • changes to tax and regulatory policies.
Other factors that could cause demand for our products to fluctuate include: • a downturn in the computing, networking, communications, storage, aerospace, government, mobile or industrial markets; • changes in consumer confidence caused by changes in market conditions, including changes in the credit markets, expectations for employment and inflation and energy prices; • changes in the level of customers’ components inventory; • competitive pressures, including pricing pressures, from companies that have competing products, architectures, manufacturing technologies and marketing programs; • changes in technology or customer product needs; • strategic actions taken by our competitors; • market acceptance of our products; • changes in prevailing or available interest rates or liquidity of the domestic capital and lending markets; • exchange rates and currency controls and restrictions on the movement of capital out of country; • recent and potential bank failures; • inflation; and • changes to tax and regulatory policies.
Our ability to maintain profitability depends in part on revenue growth from, among other things, increased demand for our memory solutions, products and related service offerings in our current markets including Brazil, growth in our IPS and LED businesses, the performance of our acquired companies as well as our ability to expand into new markets.
Our ability to achieve or maintain profitability depends in part on revenue growth from, among other things, increased demand for our memory solutions, products and related service offerings in our current markets, including Brazil, growth in our IPS and LED businesses, the performance of our acquired companies as well as our ability to expand into new markets.
Under the Amended Credit Facility, in certain circumstances we also are required to satisfy and maintain specified financial ratios if we have outstanding debt under the revolver. Our ability to meet those financial ratios could be affected by events beyond our control, and there can be no assurance that we will meet those ratios.
Under the Amended Credit Agreement, in certain circumstances we also are required to satisfy and maintain specified financial ratios if we have outstanding debt under the revolver. Our ability to meet those financial ratios could be affected by events beyond our control, and there can be no assurance that we will meet those ratios.
As a result, our competitors may be able to respond better to new or emerging technologies or standards and to changes in customer requirements. Further, some of our competitors are in a better financial and marketing position from which to influence industry acceptance of a particular product standard or competing technology than we are.
As a result, our competitors may be able to respond better to new or emerging technologies or standards and to changes in customer requirements. Further, some of our competitors are in a better financial and marketing positions from which to influence industry acceptance of a particular product standard or competing technology than we are.
A default under the Indenture or the fundamental change itself could also lead to a default under agreements governing our other indebtedness, which may result in that other indebtedness becoming immediately payable in full. We may not have sufficient funds to satisfy all amounts due under the other indebtedness and the 2026 Notes.
A default under the Indenture or the fundamental change itself could also lead to a default under agreements governing our other indebtedness, which may result in that other indebtedness becoming immediately payable in full. We may not have sufficient funds to satisfy all amounts due under the other indebtedness and the Convertible Notes.
Applicable law, regulatory authorities and the agreements governing our other indebtedness, including our Amended Credit Agreement, may restrict our ability to repurchase the 2026 Notes or pay the cash amounts due upon conversion. Our failure to repurchase 2026 Notes or to pay the cash amounts due upon conversion when required will constitute a default under the Indenture.
Applicable law, regulatory authorities and the agreements governing our other indebtedness, including our Amended Credit Agreement, may restrict our ability to repurchase the Convertible Notes or pay the cash amounts due upon conversion. Our failure to repurchase the Convertible Notes or to pay the cash amounts due upon conversion when required will constitute a default under the Indenture.
These alternative measures may not be available to us, may not be successful and may not permit us to meet our scheduled debt service obligations, which could result in substantial liquidity problems. Our Amended Credit Facility restricts our ability to dispose of our assets and use the proceeds from the disposition.
These alternative measures may not be available to us, may not be successful and may not permit us to meet our scheduled debt service obligations, which could result in substantial liquidity problems. Our Amended Credit Agreement restricts our ability to dispose of our assets and use the proceeds from the disposition.
The market price of our ordinary shares could be subject to wide fluctuations in response to the risk factors listed in this section and others beyond our control, including those risks described herein as well as: • the failure of financial analysts to cover our company; • negative or inaccurate coverage by financial analysts; 37 • changes in financial estimates by financial analysts, any failure by us to meet or exceed any of these estimates or changes in the recommendations of any financial analysts that elect to follow our company or our competitors; • changes in the market valuations of other companies operating in our industry; • announcement of, or expectation of, additional financing efforts; • future sales of our ordinary shares; • share price and volume fluctuations attributable to inconsistent trading volume levels of our ordinary shares; and • general economic and market conditions.
The market price of our ordinary shares has been in the past and could be in the future subject to wide fluctuations in response to the risk factors listed in this section and others beyond our control, including those risks described herein as well as: • the failure of financial analysts to cover our company; • negative or inaccurate coverage by financial analysts; • changes in financial estimates by financial analysts, any failure by us to meet or exceed any of these estimates or changes in the recommendations of any financial analysts that elect to follow our company or our competitors; • changes in the market valuations of other companies operating in our industry; • announcement of, or expectation of, additional financing efforts; • future sales of our ordinary shares; • share price and volume fluctuations attributable to inconsistent trading volume levels of our ordinary shares; and • general economic and market conditions.
Furthermore, acquisitions may require material charges and could result in adverse tax consequences, substantial depreciation, deferred compensation charges, liabilities under earn-out provisions, including under the Earnout Note we issued in connection with the acquisition of Cree’s LED Business, the amortization of amounts related to deferred compensation and identifiable purchased intangible assets or impairment of goodwill or other intangibles, any of which could negatively impact our business, results of operations and financial condition.
Furthermore, acquisitions may require material charges and could result in adverse tax consequences, substantial depreciation, deferred compensation charges, liabilities under earnout provisions, including under the LED 27 Earnout Note we issued in connection with the acquisition of Cree’s LED Business, the amortization of amounts related to deferred compensation and identifiable purchased intangible assets or impairment of goodwill or other intangibles, any of which could negatively impact our business, results of operations and financial condition.
Our business may not generate sufficient cash flows from operations, and future borrowings may not be available to us under our debt arrangements, including our Amended Credit Facility (as defined below), in an amount sufficient to enable us to service our debt or to fund our other liquidity needs.
Our business may not generate sufficient cash flows from operations, and future borrowings may not be available to us under our debt arrangements, including our Amended Credit Agreement (as defined below), in an amount sufficient to enable us to service our debt or to fund our other liquidity needs.
Further, legislation enacted in 2017, informally titled the Tax Cuts and Jobs Act, (“Tax Act”), as modified by the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) changed the federal rules governing net operating loss carryforwards.
Legislation enacted in 2017, informally titled the Tax Cuts and Jobs Act (“Tax Act”), as modified in 2020 by the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), changed the federal rules governing net operating loss carryforwards.
We are subject to changes in tax laws, treaties and regulations or the interpretation or enforcement thereof in the Cayman Islands, United States, Brazil, Malaysia and jurisdictions in which we or any of our subsidiaries operate or are resident.
We are subject to changes in tax laws, treaties and regulations or the interpretation or enforcement thereof in the Cayman Islands, United States, Brazil, Malaysia, Ireland and other jurisdictions in which we or any of our subsidiaries operate or are resident.
If enacted, exchange controls may limit our ability to receive dividends and other distributions from our foreign subsidiaries. • High rates of inflation in the future would adversely affect our business, results of operations and financial condition. • Political, economic and market conditions and the perception of risk in Brazil and emerging markets may cause the market price of our ordinary shares to decline. • We may have limited legal recourse under the laws of China if disputes arise under our agreements with third parties.
If enacted, exchange controls may limit our ability to receive dividends and other distributions from our foreign subsidiaries. • High rates of inflation in the future would materially adversely affect our business, results of operations and financial condition. • Political, economic and market conditions and the perception of risk in Brazil and emerging markets may cause the market price of our ordinary shares to decline. • We may have limited legal recourse under the laws of China if disputes arise under our agreements.
In addition, taxable income in any jurisdiction is dependent upon acceptance of our operational practices and intercompany transfer pricing by local tax authorities as being on an arm’s length basis.
Taxable income in any jurisdiction is dependent in part upon acceptance of our operational practices and intercompany transfer pricing by local tax authorities as being on an arm’s length basis.
We are also subject to a variety of U.S. federal and state employment and labor laws and regulations, including, without limitation, the Americans with Disabilities Act, the Federal Fair Labor Standards Act, the Worker Adjustment and Restructuring Notification Act and other regulations related to working conditions, wage-hour pay, overtime pay, employee benefits, antidiscrimination and termination of employment.
We are also subject to a variety of U.S. federal and state employment and labor laws and regulations, including, without limitation, the Americans with Disabilities Act, the Federal Fair Labor Standards Act, the Worker Adjustment and Restructuring Notification Act and other regulations related to working conditions, wage-hour pay, overtime pay, employee benefits, anti-discrimination and termination of employment.
Our amended and restated memorandum and articles of association include provisions that could limit the ability of others to acquire control of us, modify our structure or cause us to engage in change of control transactions.
Our amended and restated memorandum and articles of association includes provisions that could limit the ability of others to acquire control of us, modify our structure or cause us to engage in change of control transactions.
Tariffs or other trade restrictions or taxes could have an adverse impact on our operations. We source materials from and sell and manufacture products in foreign countries, including Brazil and China, making the price and availability of our merchandise susceptible to international trade risks and other international conditions.
Tariffs or other trade restrictions or taxes have had in the past, and could have in the future, an adverse impact on our operations. We source materials from and sell and manufacture products in foreign countries, including Brazil and China, making the price and availability of our merchandise susceptible to international trade risks and other international conditions.
The consideration for this acquisition consisted of approximately $225 million in cash, plus an earn-out of up to $50 million based on the gross profit performance of the Stratus business during the first full 12 fiscal months of Stratus following the closing of the acquisition. We plan to continue exploring additional acquisition opportunities in the future.
The consideration for this acquisition consisted of approximately $225 million in cash, plus an earnout of up to $50 million based on the gross profit performance of the Stratus business during the first full 12 fiscal months of Stratus following the closing of the acquisition. We plan to continue exploring additional acquisition opportunities in the future.
If we are not able to refinance or restructure our debt obligations before they become due, this could cause us to default on our debt obligations and impair our liquidity.
If we are not able to repay our debt obligations as they become due, or if we are not able to refinance or restructure our debt obligations before they become due, this could cause us to default on our debt obligations and impair our liquidity.
The consideration for this acquisition consisted of approximately $200 million in the form of cash and an unsecured promissory note, plus an earn-out of up to $125 million based on the revenue and gross profit performance of the LED business in the four fiscal quarters of Cree following the closing.
The consideration for this acquisition consisted of approximately $200 million in the form of cash and an unsecured promissory note, plus an earnout of up to $125 million based on the revenue and gross profit performance of the LED business in the four fiscal quarters of Cree following the closing.
This activity could also cause or avoid an increase or a decrease in the market price of our ordinary shares or the 2026 Notes. 36 The potential effect, if any, of these transactions and activities on the trading price of our ordinary shares or the 2026 Notes will depend in part on market conditions.
This activity could cause or avoid an increase or a decrease in the market price of our ordinary shares or the Convertible Notes. The potential effect, if any, of these transactions and activities on the trading price of our ordinary shares or the 2026 Notes will depend in part on market conditions.
Risks Related to Our Ordinary Shares • The trading price of our ordinary shares has been and may continue to be volatile. • If our estimates or judgments relating to our critical accounting estimates are based on assumptions that change or prove to be incorrect, our results of operations could fall below expectations of securities analysts and investors, resulting in a decline in the market price of our ordinary shares. • Future sales of our ordinary shares in the public market, or the perception that these sales may occur, could cause our share price to fall. • Anti-takeover provisions in our organizational documents may discourage our acquisition by a third party, which could limit shareholders’ opportunity to sell their ordinary shares at a premium. 16 • We do not anticipate paying any cash dividends in the foreseeable future.
Risks Related to Our Ordinary Shares • The trading price of our ordinary shares has been and may continue to be volatile, and actual or perceived future sales of our ordinary shares could cause our share price to fall. • If our estimates or judgments relating to our critical accounting estimates are based on assumptions that change or prove to be incorrect, our results of operations could fall below expectations of securities analysts and investors, resulting in a decline in the market price of our ordinary shares. • Anti-takeover provisions in our organizational documents may discourage our acquisition by a third party, which could limit shareholders’ opportunity to sell their ordinary shares at a premium. • We do not anticipate paying any cash dividends in the foreseeable future.
In addition, any economic and political uncertainty caused by the United States tariffs imposed on goods from China, among other potential countries, and any corresponding tariffs or currency devaluations from China or such other countries in response, has negatively impacted, and may in the future, negatively impact, demand and/or increase the cost for certain of our products, particularly within our LED business.
In addition, any economic and political uncertainty caused by the U.S. tariffs imposed on goods from China, among other potential countries, and any corresponding tariffs or currency devaluations from China or such other countries in response, has negatively impacted, and may in the future, negatively impact, demand and/or increase the cost for certain of our products, particularly within our LED business.
Our capped call transactions may affect the value of our publicly traded debt and ordinary shares. In connection with the pricing of the 2026 Notes, we have entered into privately negotiated capped call transactions (“Capped Calls”), with certain financial institutions.
Our capped call transactions may affect the value of our publicly traded debt and ordinary shares. In connection with the pricing of the Convertible Notes, we entered into privately negotiated capped call transactions (“Capped Calls”), with certain financial institutions.
Item 1A. Risk Factors You should carefully consider the risks and uncertainties described below and the other information in this Annual Report on Form 10-K, including “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and related notes.
Item 1A. Risk Factors You should carefully consider the risks and uncertainties described below and the other information in this Annual Report on Form 10-K, including “PART II – Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes.
Breaches of our security systems, or those of our customers, suppliers or business partners, could expose us to losses. We manage, store, transmit and otherwise process various proprietary information and sensitive personal or confidential data. In addition, our cloud computing businesses routinely process, store and transmit data, including sensitive and personally identifiable information, for our customers.
Actual or perceived breaches of our security systems, or those of our customers, suppliers or business partners, could expose us to losses. We manage, store, transmit and otherwise process various proprietary information and sensitive personal or confidential data. In addition, our cloud computing businesses routinely process, store and transmit data, including sensitive and personal data, for our customers.
GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, as described in “Item 7.
GAAP requires management to make estimates and assumptions that affect the amounts reported in the accompanying consolidated financial statements and notes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, as described in “PART II – Item 7.
We may not have enough available cash or be able to obtain financing at the time we are required to repurchase the 2026 Notes or pay the cash amounts due upon conversion.
We may not have enough available cash or be able to obtain financing at the time we are required to repurchase the Convertible Notes or pay the cash amounts due 39 upon conversion.
See “Cautionary Note Regarding Forward-Looking Statements” for additional information. Our actual results could differ materially and adversely from those anticipated in these forward-looking statements as a result of certain factors, including the risks facing our company described below and elsewhere in this Annual Report.
This Annual Report also contains forward-looking statements that involve risks and uncertainties. See “Cautionary Note Regarding Forward-Looking Statements” for additional information. Our actual results could differ materially and adversely from those anticipated in these forward-looking statements as a result of certain factors, including the risks facing our company described below and elsewhere in this Annual Report.
A disruption in or termination of our supply relationship with any of our significant suppliers or our inability to develop relationships with new suppliers, if required, would cause delays, disruptions or reductions in product manufacturing and shipments or require product redesigns which could damage relationships with our customers, increase our costs, reduce our margins or increase the prices we need to charge for our products and could materially and adversely affect our business, results of operations and financial condition. 22 We may be unable to adapt to technological change.
A disruption in or termination of our supply relationship with any of our significant suppliers or our inability to develop relationships with new suppliers, if required, would cause delays, disruptions or reductions in product manufacturing and shipments or require product redesigns which could damage relationships with our customers, increase our costs, reduce our margins or increase the prices we need to charge for our products and could materially and adversely affect our business, results of operations and financial condition.
In addition, we may be held liable for actions taken by such parties even though such parties are not subject to the FCPA or similar laws.
In addition, we may be held liable for actions taken by such parties even if such parties themselves are not subject to the FCPA or similar laws.
The industries in which we conduct business are characterized by constant and rapid technological changes and product obsolescence. For example, new manufacturing process technologies using smaller feature sizes and offering better performance characteristics are generally introduced every one to two years.
We may be unable to adapt to technological change. The industries in which we conduct business are characterized by constant and rapid technological changes and product obsolescence. For example, new manufacturing process technologies using smaller feature sizes and offering better performance characteristics are generally introduced every one to two years.
Disruption of our operations at any one of our manufacturing facilities would substantially harm our business. We rely on a limited number of production facilities for each of our various product lines. A disruption at one of our manufacturing facilities could adversely impact our manufacturing operations and consequently our customer relations and our business.
We rely on a limited number of production facilities for each of our various product lines. A disruption at one of our manufacturing facilities could adversely impact our manufacturing operations and consequently our customer relations and our business.
Certain provisions in the 2026 Notes and the Indenture could make a third-party attempt to acquire us more difficult or expensive. For example, if a takeover constitutes a “fundamental change”, then noteholders will have the right to require us to repurchase their 2026 Notes for cash.
Certain provisions in the Convertible Notes and their respective Indentures could make a third-party attempt to acquire us more difficult or expensive. For example, if a takeover constitutes a “fundamental change”, then noteholders will have the right to require us to repurchase their Convertible Notes for cash.
As a result, we may not be able to obtain the materials that we need to fill customer orders. If any of our suppliers experience quality control or intellectual property infringement problems, we may not be able to fill customer orders.
As a result, we may not 21 be able to obtain the materials that we need to fill customer orders. If any of our suppliers experience quality control or intellectual property infringement problems, this may further impact our ability to fill customer orders.
Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – Debt” and “Item 8. Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – Subsequent Events.” These or future credit agreements may contain restrictive covenants that limit our ability to engage in specified transactions and prohibit us from voluntarily prepaying certain of our other indebtedness.
Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – Debt.” These or future credit agreements may contain restrictive covenants that limit our ability to engage in specified transactions and prohibit us from voluntarily prepaying certain of our other indebtedness.
In either case, and in other cases, our obligations under the 2026 Notes and the Indenture could increase the cost of acquiring us or otherwise discourage a third party from acquiring us, including in a transaction that noteholders or holders of our ordinary shares may view as favorable.
In either case, and in other cases, our obligations under the Convertible Notes and their respective Indentures could increase the cost of acquiring us or otherwise discourage a third party from acquiring us, including in a transaction that noteholders or holders of our ordinary shares may view as favorable.

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Item 2. Properties

Properties — owned and leased real estate

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Biggest changeThe following is a summary of our principal facilities as of October 3, 2022: Location Size (1) Leased or Owned Lease Expiration Logistics Services Manufacturing Procurement R&D Sales Supply Chain Services Atibaia, Brazil 87 Leased Jun 2032 X X 53 Leased Oct 2027 X X X Durham, NC 58 Leased Feb 2023 X X X 102 Leased May 2038 X X X Fremont, CA 44 Leased Jul 2030 X X X 42 Leased Dec 2030 X X X Huizhou, China (2)(3) 824 Owned N/A X X X Huntington Beach, CA 58 Leased Jan 2025 X Manaus, Brazil 48 Leased Dec 2030 X X X Maynard, MA 102 Leased Aug 2026 X X X Milpitas, CA 21 Leased Sep 2031 Newark, CA 79 Leased Apr 2023 X X X X X 30 Leased Feb 2022 X Penang, Malaysia (4) 87 Owned N/A X X X X X 26 Leased Jul 2022 X X 26 Leased Sep 2022 X Tempe, AZ 93 Leased Dec 2024 X X (1) Stated in thousands of square feet.
Biggest changeThe following is a summary of our principal facilities as of August 25, 2023. 46 Location Size (1) Leased or Owned Lease Expiration Logistics Services Manufacturing Procurement R&D Sales Supply Chain Services Atibaia, Brazil 72 Leased Jun 2032 X X 31 Leased Oct 2027 X X X Durham, NC 102 Leased May 2038 X X X Fremont, CA 44 Leased Jul 2030 X X X 42 Leased Dec 2030 X X X Huizhou, China (2) 824 Owned N/A X X X Huntington Beach, CA 58 Leased Jan 2025 X Manaus, Brazil 40 Leased Dec 2030 X X X Maynard, MA 102 Leased Aug 2026 X X X Milpitas, CA 21 Leased Sep 2031 Newark, CA 79 Leased Oct 2031 X X X X X 30 Leased Feb 2024 X Penang, Malaysia (3) 87 Owned N/A X X X X X 26 Leased Mar 2026 X X 26 Leased Sep 2024 X Tempe, AZ 50 Leased Dec 2024 X X (1) Stated in thousands of square feet.
(2) Our Huizhou, China facility is situated on leased land with a term expiring in 2082. (3) Our Huizhou, China facility includes 333 thousand square feet of dormitory space. (4) Our Penang, Malaysia facility is situated on leased land with a term expiring in 2070.
(2) Our Huizhou, China facility is situated on leased land with a term expiring in 2082 and includes 333 thousand square feet of dormitory space. (3) Our Penang, Malaysia facility is situated on leased land with a term expiring in 2070.
In addition to the principal facilities in the table above, we lease additional facilities in the United States, China, Hong Kong, India, Ireland, Japan, Scotland, Singapore, South Korea and Taiwan. 42
In addition to the principal facilities in the table above, we lease additional facilities in the United States, China, Hong Kong, India, Ireland, Japan, Scotland, Singapore, South Korea and Taiwan. After the closing of the SMART Brazil divestiture, we will no longer have facilities in Brazil.

Item 5. Market for Registrant's Common Equity

Market for Common Equity — stock, dividends, buybacks

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Biggest changeThe performance was plotted using the following data: Aug 31, 2017 Aug 31, 2018 Aug 31, 2019 Aug 31, 2020 Aug 31, 2021 Aug 31, 2022 SMART Global Holdings, Inc. $ 100 $ 166 $ 143 $ 127 $ 244 $ 185 Nasdaq Composite Index 100 127 127 189 247 192 Russell 2000 Index 100 125 109 116 170 140
Biggest changeThe performance was plotted using the following data: August 31, 2018 August 31, 2019 August 31, 2020 August 31, 2021 August 31, 2022 August 31, 2023 SMART Global Holdings, Inc. $ 100 $ 86 $ 76 $ 147 $ 111 $ 157 Nasdaq Composite Index $ 100 $ 99 $ 148 $ 193 $ 151 $ 181 Russell 2000 Index $ 100 $ 87 $ 92 $ 136 $ 112 $ 117 Nasdaq Electronic Components Index $ 100 $ 95 $ 107 $ 154 $ 136 $ 155
The following graph illustrates a comparison of cumulative total returns for our ordinary shares, the Nasdaq Composite Index and the Russell 2000 Inde x from August 31, 2017 through August 31, 2022. We operate on a 52 or 53 week fiscal year, which ends on the last Friday in August.
The following graph illustrates a comparison of cumulative total returns for our ordinary shares, the Nasdaq Composite Index, the Russell 2000 Index and the Nasdaq Electronic Components Index from August 31, 2018 through August 31, 2023. We operate on a 52- or 53-week fiscal year, which ends on the last Friday in August.
Issuer Purchases of Equity Securities Common Stock Repurchase Authorization On April 4, 2022, our Board of Directors approved a $75 million share repurchase authorization, under which the Company may repurchase its outstanding ordinary shares from time to time through open market purchases, privately-negotiated transactions or otherwise.
Issuer Purchases of Equity Securities Common Stock Repurchase Authorization On April 5, 2022, we announced that our Board of Directors approved a $75 million share repurchase authorization, under which we may repurchase our outstanding ordinary shares from time to time through open market purchases, privately-negotiated transactions or otherwise.
Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities Market Information for Ordinary Shares Our ordinary shares are listed on the Nasdaq Global Select Market under the trading symbol “SGH.” Holders of Record As of October 3, 2022 there were 53 registered holders of record of our ordinary shares (not including beneficial holders of our ordinary shares held in street name).
Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities Market Information for Ordinary Shares Our ordinary shares are listed on the Nasdaq Global Select Market under the trading symbol “SGH.” Holders of Record As of October 9, 2023 there were 45 registered holders of record of our ordinary shares (not including beneficial holders of our ordinary shares held in street name by brokers and other institutions on behalf of shareholders).
As a result, the last day of our fiscal year varies. For consistent presentation and comparison to the industry indices shown herein, we have calculated our share performance graph as of August 31 for each year.
For consistent presentation and comparison to the industry indices shown herein, we have calculated our share performance graph as of August 31 for each year. 48 Note: Management cautions that the share price performance information shown in the graph above may not be indicative of current share price levels or future share price performance.
The share repurchase authorization has no expiration date but may be suspended or terminated by the Board of Directors at any time.
The share repurchase authorization has no expiration date but may be suspended or terminated by our Board of Directors at any time. As of August 25, 2023, the remaining dollar value of shares that may be repurchased under this authorization was $16.6 million. No shares were repurchased during the fourth quarter of 2023.
Note: Management cautions that the share price performance information shown in the graph above may not be indicative of current share price levels or future share price performance. The share performance graph assumes $100 was invested on August 31, 2017. Any dividends paid during the period presented were assumed to be reinvested.
The share performance graph assumes $100 was invested in our ordinary shares and in the other indices on August 31, 2018. Any dividends paid during the period presented were assumed to be reinvested.
Removed
The following table summarizes repurchases of our ordinary shares during our fourth quarter of 2022: Period Total number of shares (or units) purchased Average price paid per share (or unit) Total number of shares (or units) purchased as part of publicly announced plans or programs Maximum number (or approximate dollar value) of shares (or units) that may yet be purchased under the plans or programs May 28, 2022 through June 24, 2022 569,186 $ 20.65 569,186 June 25, 2022 through July 22, 2022 1,615,792 $ 17.35 1,615,792 July 23, 2022 through August 26, 2022 — $ — — 2,184,978 $ 18.21 2,184,978 $ 25,000,000 Ordinary shares withheld as payment of withholding taxes and exercise prices in connection with the vesting or exercise of equity awards are not required to be disclosed under Item 703 of Regulation S-K and accordingly are excluded from the amounts in the table above. 44 Other Share Repurchases On January 7, 2021, we agreed to repurchase an aggregate of 1,100,000 of our ordinary shares, $0.03 par value per share, from Silver Lake Partners III Cayman (AIV III), L.P., Silver Lake Technology Investors III Cayman, L.P., Silver Lake Sumeru Fund Cayman, L.P. and Silver Lake Technology Investors Sumeru Cayman, L.P. at a purchase price of $40.30 per share for aggregate consideration of $44.3 million, in a privately negotiated transaction.
Added
As a result, the last day of our fiscal year varies.

Item 7. Management's Discussion & Analysis

Management's Discussion & Analysis (MD&A) — revenue / margin commentary

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Biggest changeIf such disruptions worsen or are prolonged, or if there is meaningful disruption in our supply arrangement with any of our third-party suppliers, our operating results and financial condition could be adversely affected. 47 Results of Operations Year ended August 26, 2022 % of net sales (1) August 27, 2021 % of net sales (1) August 28, 2020 % of net sales (1) Net sales: Memory Solutions $ 975,181 53.6 % $ 931,818 62.1 % $ 857,237 76.4 % Intelligent Platform Solutions 440,986 24.2 % 344,757 23.0 % 265,140 23.6 % LED Solutions 403,185 22.2 % 224,567 15.0 % — — % Total net sales 1,819,352 100.0 % 1,501,142 100.0 % 1,122,377 100.0 % Cost of sales 1,366,132 75.1 % 1,192,762 79.5 % 905,981 80.7 % Gross profit 453,220 24.9 % 308,380 20.5 % 216,396 19.3 % Operating expenses: Research and development 77,356 4.3 % 49,274 3.3 % 52,056 4.6 % Selling, general and administrative 220,031 12.1 % 171,509 11.4 % 123,010 11.0 % Change in fair value of contingent consideration 41,324 2.3 % 32,400 2.2 % — — % Total operating expenses 338,711 18.6 % 253,183 16.9 % 175,066 15.6 % Operating income 114,509 6.3 % 55,197 3.7 % 41,330 3.7 % Non-operating (income) expense: Interest expense, net 21,169 1.2 % 17,600 1.2 % 15,000 1.3 % Other non-operating (income) expense 4,837 0.3 % (375) — % 16,970 1.5 % Total non-operating (income) expense 26,006 1.4 % 17,225 1.1 % 31,970 2.8 % Income before taxes 88,503 4.9 % 37,972 2.5 % 9,360 0.8 % Income tax provision 19,911 1.1 % 15,466 1.0 % 10,503 0.9 % Net income (loss) 68,592 3.8 % 22,506 1.5 % (1,143) (0.1) % Net income attributable to noncontrolling interest 2,035 0.1 % 1,196 0.1 % — — % Net income (loss) attributable to SGH $ 66,557 3.7 % $ 21,310 1.4 % $ (1,143) (0.1) % (1) Summations of percentages may not compute precisely due to rounding.
Biggest changeIf such disruptions worsen or are prolonged, or if there is meaningful disruption in our supply arrangement with any of our third-party suppliers, our operating results and financial condition could be adversely affected. 51 Results of Operations Year ended August 25, 2023 % of net sales (1) August 26, 2022 % of net sales (1) August 27, 2021 % of net sales (1) Net sales: Memory Solutions $ 443,264 30.8 % $ 551,705 39.5 % $ 486,205 46.1 % Intelligent Platform Solutions 749,708 52.0 % 440,986 31.6 % 344,757 32.7 % LED Solutions 248,278 17.2 % 403,185 28.9 % 224,567 21.3 % Total net sales 1,441,250 100.0 % 1,395,876 100.0 % 1,055,529 100.0 % Cost of sales 1,026,079 71.2 % 1,004,831 72.0 % 817,556 77.5 % Gross profit 415,171 28.8 % 391,045 28.0 % 237,973 22.5 % Operating expenses: Research and development 90,565 6.3 % 77,472 5.6 % 59,933 5.7 % Selling, general and administrative 260,722 18.1 % 204,839 14.7 % 158,174 15.0 % Impairment of goodwill 19,092 1.3 % — — % — — % Change in fair value of contingent consideration 29,000 2.0 % 41,324 3.0 % 32,400 3.1 % Other operating (income) expense 7,047 0.5 % 234 — % 3,172 0.3 % Total operating expenses 406,426 28.2 % 323,869 23.2 % 253,679 24.0 % Operating income (loss) 8,745 0.6 % 67,176 4.8 % (15,706) 3.7 % Non-operating (income) expense: Interest expense, net 36,421 2.5 % 24,345 1.7 % 17,141 1.6 % Other non-operating (income) expense 11,837 0.8 % 350 — % (582) (0.1) % Total non-operating (income) expense 48,258 3.3 % 24,695 1.8 % 16,559 1.6 % Income (loss) before taxes (39,513) (2.7) % 42,481 3.0 % (32,265) (3.1) % Income tax provision (benefit) (49,203) (3.4) % 18,074 1.3 % 9,689 0.9 % Net income (loss) from continuing operations 9,690 0.7 % 24,407 1.7 % (41,954) (4.0) % Net income (loss) from discontinued operations (195,384) (13.6) % 44,185 3.2 % 64,460 6.1 % Net income (loss) (185,694) (12.9) % 68,592 4.9 % 22,506 2.1 % Net income attributable to noncontrolling interest 1,832 0.1 % 2,035 0.1 % 1,196 0.1 % Net income (loss) attributable to SGH $ (187,526) (13.0) % $ 66,557 4.8 % $ 21,310 2.0 % (1) Summations of percentages may not compute precisely due to rounding.
Supply chain services includes procurement, logistics, inventory management, temporary warehousing, kitting and packaging. Professional services include solution design, system installation, software automation and managed support services 54 related to HPC and storage systems. A portion of our product sales include extended warranty and on-site services, subscriptions to our HPC environment, professional services, software and related support.
Professional services include solution design, system installation, software automation and managed support services related to HPC and storage systems. Supply chain services includes procurement, logistics, inventory management, temporary warehousing, kitting and packaging. A portion of our product sales include extended warranty and on-site services, subscriptions to our HPC environment, professional services, software and related support.
We believe our diversified business segments may provide a natural hedge against downturns in 46 any particular industry although broader macro-economic trends, such as the COVID-19 pandemic, can adversely affect all three segments concurrently. Shifts in the Mix of Our Revenue.
We believe our diversified business segments may provide a natural hedge against downturns in any particular industry although broader macro-economic trends, such as the COVID-19 pandemic, can adversely affect all three segments concurrently. Shifts in the Mix of Our Revenue.
The standalone selling price for products primarily involves the cost to produce the deliverable plus the anticipated margin and for services is estimated based on our approved list price. A portion of our service revenue is from professional services, including installation and other services and hardware and software related support.
The standalone selling price for products primarily involves the cost to produce the deliverable plus the anticipated margin and for services is estimated based on our approved list price. 59 A portion of our service revenue is from professional services, including installation and other services and hardware and software related support.
The increases in accounts payable and accrued expenses and in inventories were primarily due to higher inventories among all business areas. The increase in accounts receivable was primarily due to higher gross sales primarily in our Memory Solutions and IPS segments.
The increases in accounts payable and accrued 56 expenses and in inventories were primarily due to higher inventories among all business areas. The increase in accounts receivable was primarily due to higher gross sales primarily in our Memory Solutions and IPS segments.
The increase in accounts receivable was primarily due to higher gross sales in our Memory Solutions and IPS businesses. The decreases in both accounts payable and accrued expenses and inventories were primarily due to lower inventories in our Memory Solutions and IPS businesses.
The increase in accounts receivable was primarily due to higher gross sales, primarily in our Memory Solutions and IPS segments. The decreases in both accounts payable and accrued expenses and in inventories were primarily due to lower inventories in our Memory Solutions and IPS businesses.
We typically obtain independent third- 52 party valuation studies to assist in determining fair values, including assistance in determining future cash flows, discount rates and comparable market values.
We typically obtain independent third-party valuation studies to assist in determining fair values, including assistance in determining future cash flows, discount rates and comparable market values.
In connection with these arrangements, customers obtain control and benefit from the services as they are performed. The terms for these arrangements provide us with a legally enforceable right to receive payment, including a reasonable profit margin upon customer cancellation, for performance completed to date. Accordingly, we recognize revenue over time as we complete the manufacture of these products.
In connection with these arrangements, customers obtain control and benefit from products as they are completed. The terms for these arrangements provide us with a legally enforceable right to receive payment, including a reasonable profit margin upon customer cancellation, for performance completed to date. Accordingly, we recognize revenue over time as we complete the manufacture of these products.
Under the terms of these arrangements, we cannot repurpose products without the customer’s consent and accordingly, we recognize revenue at the point in time when products are completed and made available to the customer. Service Revenue : Our service revenue is derived from supply chain services as well as professional services.
Under the terms of these arrangements, we cannot repurpose products without the customer’s consent and accordingly, we recognize revenue at the point in time when products are completed and made available to the customer. Service Revenue : Our service revenue is derived from professional services and supply chain services.
We use the expected value method, based on historical price adjustments and current pricing trends, to estimate the amount of revenue recognized from sales to distributors. Differences between the estimated and actual amounts are recognized as adjustments to revenue. Non-cancellable, nonrefundable customized product sales are recognized over time on a cost incurred basis.
We use the expected value method, based on historical price adjustments and current pricing trends, to estimate the amount of revenue recognized from sales to distributors. Differences between the estimated and actual amounts are recognized as adjustments to revenue. Noncancellable, nonrefundable customized product sales are recognized over time on a cost incurred basis.
We expect that our existing cash and cash equivalents, borrowings available under our credit facilities and cash generated by operating activities will be sufficient to fund our operations for at least the next twelve months. We may from time to time seek additional equity or debt financing.
We expect that our existing cash and cash equivalents, short-term investment, borrowings available under our credit facilities and cash generated by operating activities will be sufficient to fund our operations for at least the next twelve months. We may from time to time seek additional equity or debt financing.
We have operations in Malaysia, where we have tax incentive arrangements for our pioneer status activities and our global supply chain business. The statutory tax rate for Malaysia is 24%. These Malaysia arrangements are scheduled to expire in August 2028 and are subject to certain conditions, for which we have complied in 2022, 2021 and 2020.
We have operations in Malaysia, where we have tax incentive arrangements for our pioneer status activities and our global supply chain operations. The statutory tax rate for Malaysia is 24%. These Malaysia arrangements are scheduled to expire in August 2028 and are subject to certain conditions, for which we have complied in 2023, 2022 and 2021.
Our actual results could differ materially from those contained in these forward-looking statements due to a number of factors, including those discussed below and elsewhere in this report. See also “Cautionary Note Regarding Forward-Looking Statements.” Our fiscal year is the 52 or 53-week period ending on the last Friday in August. Fiscal 2022, 2021 and 2020 each contained 52 weeks.
Our actual results could differ materially from those contained in these forward-looking statements due to a number of factors, including those discussed below and elsewhere in this report. See also “Cautionary Note Regarding Forward-Looking Statements.” Our fiscal year is the 52- or 53-week period ending on the last Friday in August.
In general, these future tax holidays will have tax rates greater than our prior approved tax holidays, 50 and therefore we expect that our effective income tax rate in the future may be higher depending on a combination of our overall and jurisdictional profitability. For additional information, see “Item 8.
In general, these future tax holidays will have tax rates greater than our prior approved tax holidays, and therefore we expect that our effective income tax rate in the future may be higher depending on a combination of our overall and jurisdictional profitability. See “Item 8.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and accompanying notes for the year ended August 26, 2022. This discussion contains forward looking statements that involve risks and uncertainties.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the accompanying consolidated financial statements and notes for the year ended August 25, 2023. This discussion contains forward looking statements that involve risks and uncertainties.
Cash and cash equivalents consist of funds held in demand deposit accounts and money market funds. We do not enter into investments for trading or speculative purposes.
Cash and cash equivalents consist of funds held in demand deposit accounts and money market funds. We do not acquire investments for trading or speculative purposes.
While amortization of acquisition-related intangible assets is excluded, the revenues from acquired companies is reflected in our non-GAAP measures and these intangible assets contribute to revenue generation. See “PART II – Item 8.
While amortization of acquisition-related intangible assets is excluded, the revenues from acquired companies is reflected in our non-GAAP measures and these intangible assets contribute to revenue generation. See “Item 8.
Significant judgement is required to determine when control passes to the customer and whether and when our performance obligations have been satisfied. This determination can significantly affect the timing of recognizing revenue. Product Revenue : Product revenue is generally recognized at a point in time when control of the promised goods is transferred to customers.
Significant judgement is required to determine when control passes to the customer and whether and when our performance obligations have been satisfied. This determination can significantly affect the timing of recognizing revenue. Product Revenue : Product revenue is generally recognized when control of the promised goods is transferred to customers.
From time to time, we may seek to expand our addressable market by entering new business segments where, as we did with our LED business, we identify a business opportunity at scale with a path to being accretive to our overall operations in the near term.
From time to time, we may seek to expand our addressable market by entering new business segments where, as we did with our LED business and our recently acquired Stratus Technologies business, we identify a business opportunity at scale with a path to being accretive to our overall operations in the near term.
All period references are to our fiscal periods unless otherwise indicated. All financial information for our subsidiaries in Brazil is included in our consolidated financial statements on a one-month lag because their fiscal years end on July 31 of each year. All tabular amounts are in thousands.
Fiscal years 2023, 2022 and 2021 each contained 52 weeks. All period references are to our fiscal periods unless otherwise indicated. All financial information for our subsidiaries in Brazil is included in our consolidated financial statements on a one-month lag because their fiscal years end on July 31 of each year. All tabular amounts are in thousands.
Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – Subsequent Events.” Contractual Obligations For information regarding our debt obligations, see “Item 8. Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – Debt.” For our operating lease obligations, see “Item 8.
See “Item 8. Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – Debt – Credit Facility.” Contractual Obligations For information regarding our debt obligations, see “Item 8. Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – Debt.” For our operating lease obligations, see “Item 8.
Gross margin increased to 20.5% in 2021, compared to 19.3% in 2020 primarily due to the inclusion of higher margin LED Solutions products in the second half of the year. 48 Non-GAAP Measure of Segment Operating Income Below is a table of our operating income, measured on a non-GAAP basis, which SGH management uses to supplement SGH’s financial results under GAAP to analyze its operations and make decisions as to future operational plans, and believes that this supplemental non-GAAP information is useful to investors in analyzing and assessing the Company’s past and future operating performance.
Gross margin increased to 28.0% in 2022, compared to 22.5% in 2021 primarily due to the inclusion of higher margin LED Solutions products. 52 Non-GAAP Measure of Segment Operating Income Below is a table of our operating income, measured on a non-GAAP basis, which SGH management uses to supplement SGH’s financial results under GAAP to analyze its operations and make decisions as to future operational plans and believes that this supplemental non-GAAP information is useful to investors in analyzing and assessing the company’s past and future operating performance.
Financing Activities : Net cash provided by financing activities in 2022 was $73.9 million, consisting primarily of $278.7 million in net proceeds from issuance of a term loan and $12.1 million in proceeds from the issuance of ordinary shares from our equity plans, partially offset by $127.1 million in principal repayment of the LED Purchase Price Note, $57.2 million of payments to acquire ordinary shares (including $50.0 million under our share repurchase program) and $25.0 million in net repayments of borrowings under our line of credit.
Net cash provided by financing activities from continuing operations in 2022 was $60.6 million, consisting primarily of $270.8 million in net proceeds from issuance of a term loan and $12.1 million in proceeds from the issuance of ordinary shares from our equity plans, partially offset by $126.7 million in principal repayment of debt, primarily the LED Purchase Price Note, $57.2 million of payments to acquire ordinary shares (including $50.0 million under our share repurchase program) and $25.0 million in net repayments of borrowings under our line of credit.
Business Acquisitions : Accounting for acquisitions requires us to estimate the fair value of consideration paid and the individual assets and liabilities acquired, which involves a number of judgments, assumptions and estimates that could materially affect the amount and timing of costs recognized in subsequent periods.
Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – Significant Accounting Policies.” Business Acquisitions : Accounting for acquisitions requires us to estimate the fair value of consideration paid and the individual assets and liabilities acquired, which involves a number of judgments, assumptions and estimates that could materially affect the amount and timing of costs recognized in subsequent periods.
Net Sales, Cost of Sales and Gross Profit Net sales increased by $318.2 million, or 21.2%, in 2022 compared to the prior year, due to an increase of $178.6 million of revenue from our recent acquisition of the LED Business in March 2021 and to strong performance in our IPS and Memory Solutions businesses.
Net sales increased by $340.3 million, or 32.2%, in 2022 compared to the prior year, due to an increase of $178.6 million of revenue from our acquisition of the LED Business in March 2021 and to strong performance in our IPS and Memory Solutions businesses.
Net cash provided by financing activities in 2021 was $2.8 million, consisting primarily of $25.0 million in net proceeds from borrowings under our line of credit, $14.9 million in proceeds from the issuance of ordinary shares and $11.4 million in proceeds from the issuance of debt, partially offset by $48.5 million used to repurchase our ordinary shares.
Net cash used in financing activities from continuing operations in 2021 was $14.7 million, consisting primarily of $48.5 million used to repurchase our ordinary shares, partially offset by $25.0 million in net proceeds from borrowings under our line of credit and $14.9 million in proceeds from the issuance of ordinary shares.
Items involving significant assumptions, estimates and judgments include the following: • Fair value of consideration paid or transferred (including contingent consideration); • Inventory, including estimated future selling prices, timing of product sales and completion costs for work in process; • Property, plant and equipment, including determination of values in a continued-use model; • Debt and other liabilities, including discount rate and timing of payments; • Intangible assets, including valuation methodology, estimates of future revenues and costs, profit allocation rates attributable to the acquired technology and discount rates; and • Deferred taxes, including projections of future taxable income and tax rates.
Items involving significant assumptions, estimates and judgments include the following: • Fair value of consideration paid or transferred (including contingent consideration); • Inventory, including estimated future selling prices, timing of product sales and completion costs for work in process; • Property, plant and equipment, including determination of values in a continued-use model; • Debt and other liabilities, including discount rate and timing of payments; • Intangible assets, including valuation methodology, estimates of future revenues and costs, profit allocation rates attributable to the acquired technology and discount rates; and • Deferred taxes, including projections of future taxable income and tax rates. 57 The valuation of contingent consideration in connection with an acquisition may be inherently challenging due to the dependence on the occurrence of future events and complex payment provisions.
In addition, the seller has the right to receive, and SGH will be obligated to pay, contingent consideration (if any) of up to $50 million (the “Earn-Out”) based on the gross profit performance of the Stratus business during the first full 12 fiscal months of Stratus following the closing.
In addition, the seller has the right to receive, and SGH is obligated to pay, contingent consideration of up to $50 million (the “Stratus Earnout”) based on the gross profit performance of the Stratus business during the first full 12 fiscal months of Stratus following the closing of the acquisition.
Revenue Recognition : We recognize revenue based on the transfer of control of goods and services and apply the following five-step approach: (1) identification of a contract with a customer, (2) identification of the performance obligations in the contract, (3) determination of the transaction price, (4) allocation of the transaction price to the performance obligations in the contract and (5) recognition of revenue as performance obligations are satisfied.
Estimating fair values involves significant assumptions, including future sales prices, sales volumes, costs and discount rates. 58 Revenue Recognition : We recognize revenue based on the transfer of control of goods and services and apply the following five-step approach: (1) identification of a contract with a customer, (2) identification of the performance obligations in the contract, (3) determination of the transaction price, (4) allocation of the transaction price to the performance obligations in the contract and (5) recognition of revenue as performance obligations are satisfied.
Operating cash flows also benefited from a $5.8 million net change in our operating assets and liabilities, consisting primarily of an increase of $208.1 million in accounts payable and accrued expenses and other liabilities, partially offset by increases of $137.9 million in inventories and $51.4 million in accounts receivable.
Operating cash flows also benefited from a $60.3 million net change in our operating assets and liabilities, primarily from the effects of an increase of $192.5 million in accounts payable and accrued expenses and other liabilities and a decrease of $15.4 million in other assets, partially offset by increases of $99.9 million in inventories and $47.8 million in accounts receivable.
We test other identified intangible assets with definite useful lives when events and circumstances indicate the carrying value may not be recoverable by comparing the carrying amount to the sum of undiscounted cash flows expected to be generated by the asset. Estimating fair values involves significant assumptions, including future sales prices, sales volumes, costs and discount rates.
We test other identified intangible assets with definite useful lives when events and circumstances indicate the carrying value may not be recoverable by comparing the carrying amount to the sum of undiscounted cash flows expected to be generated by the asset.
IPS net sales increased by $96.2 million, or 27.9%, primarily due to higher volumes of sales in our Penguin Computing business. Memory Solutions sales increased by $43.4 million, or 4.7%, primarily due to a 12.2% higher volume of Specialty DRAM products, partially offset by a 34.5% lower volume of mobile memory.
IPS net sales increased by $96.2 million, or 27.9%, primarily due to higher volumes of sales in our Penguin Computing business. Memory Solutions sales increased by $65.5 million, or 13.5%, primarily due to a higher sales volume of DRAM products.
We have adopted this “Fab-Light” business model to reduce our capital expenditures and operating expenses, while affording greater flexibility in adapting to shifts in demand and other market trends. In recent periods, our Fab-Light business model has contributed significantly to margin expansion in our overall business.
We have adopted this “Fab-Light” business model to reduce our capital expenditures and operating expenses, while affording greater flexibility in adapting to shifts in demand and other market trends. Our Fab-Light business model has contributed significantly to margin expansion in our overall business. However, our reliance on third-party manufacturers exposes us to risk of supply chain disruption and lost business.
Selling, General and Administrative Selling, general and administrative expense increased by $48.5 million, or 28.3%, in 2022 compared to the prior year, primarily due to $26.0 million of additional costs from the acquisition of the LED Business as well as higher personnel-related expenses, professional services and acquisition expenses associated with the acquisition.
Selling, general and administrative expense increased by $46.7 million, or 29.5%, in 2022 compared to the prior year, primarily due to additional costs from the acquisition of the LED Business which had a full year of operations compared to a half a year in 2021, as well as higher personnel-related expenses, professional services and acquisition expenses.
Gross margin increased to 24.9% in 2022 compared to 20.5% in 2021 primarily due to inclusion of higher margin LED Solutions products, as well as process and efficiency improvement in the Memory Solutions and IPS segments compared to the prior year.
Gross margin increased to 28.8% in 2023 compared to 28.0% in 2022 primarily due to inclusion of higher margin Stratus products, as well as process and efficiency improvements in the Memory Solutions and IPS segments compared to the prior year.
The valuation of contingent consideration in connection with an acquisition may be inherently challenging due to the dependence on the occurrence of future events and complex payment provisions. Estimating the fair value of contingent consideration at an acquisition date and in subsequent periods involves significant judgments, including projecting future average selling prices, future sales volumes, manufacturing costs and gross margins.
Estimating the fair value of contingent consideration at an acquisition date and in subsequent periods involves significant judgments, including projecting future average selling prices, future sales volumes, manufacturing costs and gross margins.
Operating cash flows were also adversely affected by a $121.6 million net increase in our operating assets and liabilities, consisting primarily of an increase of $97.5 million in accounts receivable and a decrease of $61.7 million in accounts payable and accrued expenses and other liabilities, partially offset by a decrease of $39.7 million in inventories.
Operating cash flows were adversely affected by a $122.3 million net change in our operating assets and liabilities, primarily from the effects of an increase of $97.8 million in accounts receivable and a decrease of $44.9 million in accounts payable and accrued expenses and other liabilities, partially offset by a decrease of $30.7 million in inventories.
IPS operating income increased by $21.1 million, or 64.0%, in 2022 compared to the prior year primarily due to higher sales, partially offset by $6.7 million higher operating expenses mainly driven by personnel-related expenses due to increased headcount to support the revenue growth.
IPS operating income increased by $19.8 million, or 66.7%, in 2022 compared to the prior year primarily due to strong revenue growth from Penguin Computing and gross margin improvement, partially offset by higher operating expenses mainly driven by personnel-related expenses due to increased headcount to support the revenue growth.
Critical Accounting Estimates The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures.
Critical Accounting Estimates The preparation of these financial statements and related disclosures in conformity with U.S. GAAP requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures. We evaluate our estimates and judgments on an ongoing basis.
IPS operating income increased by $20.6 million, or 166.4%, in 2021 compared to the prior year primarily due to higher sales, partially offset by $4.4 million higher operating expenses mainly driven by personnel-related expenses due to increased headcount to support the revenue growth.
IPS operating income increased by $61.5 million, or 124.4%, in 2023 compared to the prior year primarily due to higher sales mainly due to the Stratus acquisition and gross margin expansion, partially offset by higher operating expenses due to the Stratus acquisition as well as personnel-related expenses due in part to increased headcount to support the revenue growth.
Amounts in accounts receivable and inventories impact the determination of net cash provided by (or used in) operations. Determining whether we are the principal or agent in these transactions requires significant judgement.
Additionally, the cost of materials procured for customers under these agent services, but which remain on hand as of the end of a reporting period, are included in inventories. Amounts in accounts receivable and inventories impact the determination of net cash provided by (used in) operations. Determining whether we are the principal or agent in these transactions requires significant judgement.
Change in Fair Value of Contingent Consideration Our acquisition of the LED Business included contingent consideration, for which we estimated the fair value as of the date of acquisition to be $28.1 million. During 2022 and the second half of 2021, we recorded charges of $41.3 million and $32.4 million, respectively, to adjust the value.
During 2022 and the second half of 2021, we recorded charges of $41.3 million and $32.4 million, respectively, to adjust the value of the contingent consideration from our LED acquisition. See “Item 8.
These estimates and assumptions are used to calculate projected future cash flows for the reporting unit, which are discounted using a risk-adjusted rate to estimate a fair value. We base fair value estimates on assumptions we believe to be reasonable but that are unpredictable and inherently uncertain. Actual future results may differ from those estimates.
We base fair value estimates on assumptions we believe to be reasonable but that are unpredictable and inherently uncertain. Actual future results may differ from those estimates.
Net cash provided by operating activities in 2021 was $153.4 million, resulting primarily from net income of $22.5 million, adjusted for non-cash items of $125.0 million.
Net cash provided by operating activities from continuing operations in 2022 was $38.9 million, resulting primarily from net income of $24.4 million, adjusted for non-cash items of $136.8 million.
Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – Income Taxes.” Liquidity and Capital Resources At August 26, 2022, we had cash and cash equivalents of $363.1 million, of which $188.8 million was held outside of the United States.
Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – Divestiture of SMART Brazil.” Liquidity and Capital Resources As of August 25, 2023, we had cash, cash equivalents and short-term investments of $390.8 million, of which $82.5 million was held outside of the United States.
For more than 40 years, Stratus has provided high-availability, fault-tolerant computing to Fortune 500 companies and small-to-medium sized businesses enabling them to securely and remotely run critical applications with minimal downtime. Factors Affecting Our Operating Performance Macro-Economic Demand Factors. Our business segments each have their own unique set of demand factors.
For more than 40 years, Stratus has provided high-availability, fault-tolerant computing to Fortune 500 companies and small-to-medium sized businesses enabling them to securely and remotely run critical applications with minimal downtime. Stratus operates as part of SGH’s IPS segment. See “Item 8.
Agent Services : We provide certain supply chain services on an agent basis, whereby we procure materials on behalf of our customers and then resell such materials to our customers. Gross amounts invoiced to customers in connection with these agent services include amounts related to the services performed by us in addition to the cost of the materials procured.
Agent Services : We provide certain supply chain services on an agent basis, whereby we procure materials and services on behalf of our customers and then resell such materials or services to our customers.
Net cash provided by operating activities in 2020 was $87.2 million, comprised of a net loss of $1.1 million, adjusted for non-cash items of $78.0 million.
Net cash provided by operating activities from continuing operations in 2021 was $122.8 million, comprised of a net loss of $42.0 million, adjusted for non-cash items of $104.5 million.
Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – Commitments and Contingencies.” Cash Flows Year ended August 26, 2022 August 27, 2021 August 28, 2020 Net cash provided by operating activities $ 104,931 $ 153,350 $ 87,205 Net cash used for investing activities (38,970) (84,178) (32,041) Net cash provided by financing activities 73,879 2,849 12,594 Effect of changes in currency exchange rates 239 154 (15,086) Net increase in cash and cash equivalents $ 140,079 $ 72,175 $ 52,672 51 Operating Activities : Cash flows from operating activities reflects net income, adjusted for certain non-cash items, including depreciation and amortization expense, share-based compensation, adjustments for changes in the fair value of contingent consideration, gains and losses from investing or financing activities and from the effects of changes in operating assets and liabilities.
Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – Commitments and Contingencies.” Cash Flows Year ended August 25, 2023 August 26, 2022 August 27, 2021 Net cash provided by operating activities from continuing operations $ 63,677 $ 38,862 $ 122,840 Net cash used for investing activities from continuing operations (281,184) (21,234) (53,467) Net cash provided by (used for) financing activities from continuing operations 237,221 60,645 (14,728) Net increase in cash and cash equivalents from discontinued operations 22,520 61,567 17,376 Effect of changes in currency exchange rates 4,765 239 154 Net increase in cash and cash equivalents $ 46,999 $ 140,079 $ 72,175 Operating Activities : Cash flows from operating activities reflects net income, adjusted for certain non-cash items, including depreciation and amortization expense, share-based compensation, adjustments for changes in the fair value of contingent consideration, gains and losses from investing or financing activities and from the effects of changes in operating assets and liabilities.
If the fair value of the reporting unit exceeds its carrying value, goodwill is considered not impaired.
If the fair value of the reporting unit exceeds its carrying value, goodwill is considered not impaired. If the carrying value of the reporting unit exceeds its fair value, we would record an impairment loss up to the difference between the carrying value and implied fair value.
Acquisition of Stratus Technologies Subsequent to our fiscal year 2022, on August 29, 2022, we completed the acquisition of Storm Private Holdings I Ltd., a Cayman Islands exempted company (“Stratus Holding Company” and together with its subsidiaries, “Stratus Technologies”). At the closing, SGH paid a cash purchase price of $225 million, subject to certain adjustments.
Overview For an overview of our business, see “PART I – Item 1. Business.” Acquisition of Stratus Technologies On August 29, 2022, we completed the acquisition of Storm Private Holdings I Ltd., a Cayman Islands exempted company (“Stratus Holding Company” and together with its subsidiaries, “Stratus Technologies”).
Cost of sales increased by $173.4 million, or 14.5%, in 2022, and by $286.8 million, or 31.7%, in 2021 compared to the prior respective years, primarily due to our acquisition of the LED Business and from higher costs of materials and production costs due to higher sales for our Memory Solutions and IPS segments.
Cost of sales increased by $21.2 million, or 2.1%, in 2023 and by $187.3 million, or 22.9%, in 2022 compared to the prior respective years, primarily due to our acquisition of the Stratus Business and from higher costs of materials and production costs due to higher sales for our IPS segment.
Net cash provided by operating activities in 2022 was $104.9 million, comprised primarily of net income of $68.6 million, adjusted for non-cash items of $158.0 million.
Net cash provided by operating activities from continuing operations in 2023 was $63.7 million, comprised primarily of a net income of $9.7 million, adjusted for non-cash items of $119.3 million.
Investing Activities : Net cash used in investing activities in 2022 was $39.0 million, consisting primarily of $38.2 million used for purchases of property and equipment. Net cash used in investing activities in 2021 consisted primarily of $47.6 million used for purchases of property and equipment and $35.7 million net cash used for the acquisition of the LED Business.
Net cash used in investing activities from continuing operations in 2021 consisted primarily of $35.7 million net cash used for the acquisition of the LED Business and $16.7 million used for capital expenditures and deposits on equipment.
Net sales increased by $378.8 million, or 33.7%, in 2021 compared to the prior year, due to $224.6 million of revenue from our recent acquisition of the LED Business in March 2021 and to strong performance in our IPS and Memory Solutions businesses.
Net Sales, Cost of Sales and Gross Profit Net sales increased by $45.4 million, or 3.3%, in 2023 compared to the prior year, due to strong performance in our IPS business, partially offset by weakness in both our Memory and LED Solutions businesses.
Our management believes the accounting policies below are critical in the portrayal of our financial condition and results of operations and require management’s most difficult, subjective or complex judgments.
Estimates and judgments are based on historical experience, forecasted events and various other assumptions that we believe to be reasonable under the circumstances; however, actual results could differ from those estimates. Our management believes the accounting policies below are critical in the portrayal of our financial condition and results of operations and require management’s most difficult, subjective or complex judgments.
However, only the amount related to the agent component is recognized as revenue in our results of operations. We generally recognize revenue for these procurement, logistics and inventory management services upon the completion of such services, which typically occurs at the time of shipment of product to the customer.
We generally recognize revenue for these procurement, logistics and inventory management services upon the completion of such services, which typically occurs at the time of shipment of product to the customer. Amounts we invoice to customers for the cost of materials and services performed, which remain unpaid as of the end of a reporting period, are included in accounts receivable.
Selling, general and administrative expense increased by $48.5 million, or 39.4%, in 2021 compared to the prior year, primarily due to $21.5 million of additional costs from the acquisition of the LED Business as well as $14.1 million of higher share-based compensation expense, personnel-related expenses, professional services and acquisition expenses associated with the acquisition.
Research and development expense increased by $17.5 million, or 29.3%, in 2022 compared to the prior year, primarily due to additional costs from the acquisition of the LED Business, which had a full year of operations compared to a half a year in 2021, as well as higher personnel-related expenses and depreciation.
Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – Other Non-operating (Income) Expense.” Income Tax Provision Our provision for income taxes increased by $4.4 million in 2022, or 28.7%, compared to the prior year primarily due to higher income in non-U.S. jurisdictions subject to tax, including foreign withholding taxes.
Our provision for income taxes increased by $8.4 million in 2022, or 86.5%, compared to the prior year primarily due to higher income in non- 54 U.S. jurisdictions subject to tax and nondeductible expenses, partially offset by recording less valuation allowance expense in 2022 due to more income in the U.S. jurisdiction.
These estimates and assumptions include revenue growth rates, forecasted manufacturing costs, budgets and other expenses developed as part of our long-range planning process. We test the reasonableness of the output of our long-range planning process by calculating an implied value per share and comparing that to current share prices, analysts’ consensus pricing and management’s expectations.
We test the reasonableness of the output of our long-range planning process by calculating an implied value per share and comparing that to current share prices, analysts’ consensus pricing and management’s expectations. These estimates and assumptions are used to calculate projected future cash flows for the reporting unit, which are discounted using a risk-adjusted rate to estimate a fair value.
LED Solutions operating income of $36.1 million in 2021 was due to our acquisition of the LED Business in March 2021. 49 Operating and Non-operating (Income) Expense Research and Development Research and development expense increased by $28.1 million, or 57.0%, in 2022 compared to the prior year, primarily due to $17.0 million additional costs from the acquisition of the LED Business, as well as a decrease of $12.8 million in the Brazil financial credits that are reflected as a reduction of research and development expenses.
LED Solutions operating income increased by $14.8 million, or 43.3%, in 2022 compared to the prior year as 2022 included a full year of operations compared to half a year in 2021. 53 Operating and Non-operating (Income) Expense Research and Development Research and development expense increased by $13.1 million, or 16.9%, in 2023 compared to the prior year, primarily due to additional costs from the Stratus acquisition, offset by lower personnel-related expenses mainly driven by bonus and headcount reductions.
The Earn-Out, if any, will be payable in cash, ordinary shares of SGH, or a mix of cash and SGH Shares, at SGH’s election. Stratus is a global leader in simplified, protected, and autonomous computing platforms and services in the data center and at the Edge.
As of August 25, 2023, current liabilities include $50.0 million for the amount payable for the Stratus Earnout. Stratus is a global leader in simplified, protected and autonomous computing platforms and services in the data center and at the Edge.
We record shipping and handling costs related to revenue transactions within cost of sales as a period cost. Share-Based Compensation : Share-based compensation is estimated at the grant date based on the fair value of the award and is recognized as expense using the straight-line amortization method over the requisite service period.
We record shipping and handling costs related to revenue transactions within cost of sales as a period cost.
Net cash used in investing activities in 2020 consisted primarily of purchases of property and equipment.
Net cash used in investing activities from continuing operations in 2022 consisted primarily of $20.4 million used for capital expenditures and deposits on equipment.
Operating cash flows also benefited from a $10.3 million net change in our operating assets and liabilities, consisting primarily of an increase of $65.8 million in accounts payable and accrued expenses and other liabilities and a decrease of $10.8 million in other assets, partially offset by increases of $51.8 million in inventories and $12.3 million in accounts receivable.
Operating cash flows were adversely affected by a $65.4 million net change in our operating assets and liabilities, primarily from the effects of decreases of $256.1 million in accounts payable and accrued expenses and other liabilities and the payment of $73.7 million of contingent consideration related to our 2021 acquisition of the LED business, partially offset by the effect of decreases of $162.5 million in accounts receivable and $95.2 million in inventories.
If the carrying value of the reporting unit exceeds its fair value, we would record an impairment loss up to the difference between the carrying value and implied fair value. 53 Determining when to test for impairment, the reporting units, the assets and liabilities of the reporting unit and the fair value of the reporting unit requires significant judgment and involves the use of significant estimates and assumptions.
Determining when to test for impairment, the reporting units, the assets and liabilities of the reporting unit and the fair value of the reporting unit requires significant judgment and involves the use of significant estimates and assumptions. These estimates and assumptions include revenue growth rates, forecasted manufacturing costs, budgets and other expenses developed as part of our long-range planning process.
Memory Solutions operating income increased by $19.9 million, or 27.6%, in 2021 compared to the prior year primarily due to higher sales, as well as a decrease of $10.8 million in operating expenses mainly driven by lower research and development expense due to higher Brazil financial credits.
Memory Solutions operating income increased by $59.3 million, or 303.8%, in 2022 compared to the prior year primarily due to strong revenue growth and gross margin improvement driven by a favorable product mix, as well as lower personnel-related costs.
Year ended August 26, 2022 August 27, 2021 August 28, 2020 GAAP operating income $ 114,509 $ 55,197 $ 41,330 Share-based compensation expense 40,119 33,877 18,716 Amortization of acquisition-related intangibles 23,729 20,255 13,654 Flow-through of inventory step up — 7,090 — Out of period import tax expense — 4,345 — Acquisition and integration expenses 7,090 5,314 5,532 Change in fair value of contingent consideration 41,324 32,400 — Other 858 2,316 4,997 Non-GAAP operating income $ 227,629 $ 160,794 $ 84,229 Non-GAAP operating income by segment: Memory Solutions $ 119,849 $ 91,737 $ 71,867 Intelligent Platform Solutions 54,019 32,931 12,362 LED Solutions 53,761 36,126 — Total non-GAAP operating income by segment $ 227,629 $ 160,794 $ 84,229 Memory Solutions operating income increased by $28.1 million, or 30.6%, in 2022 compared to the prior year primarily due to higher sales, partially offset by an increase of $16.4 million in operating expenses, mainly driven by higher research and development expense due to lower Brazil financial credits.
Year ended August 25, 2023 August 26, 2022 August 27, 2021 GAAP operating income (loss) $ 8,745 $ 67,176 $ (15,706) Share-based compensation expense 39,228 37,284 30,961 Amortization of acquisition-related intangibles 44,601 23,729 20,255 Flow-through of inventory step up 2,599 — 7,090 Cost of sales-related restructure 6,813 — — Acquisition and integration expenses 20,869 7,090 5,314 Impairment of goodwill 19,092 — — Change in fair value of contingent consideration 29,000 41,324 32,400 Restructure charge 7,047 234 3,172 Other 1,800 624 (2) Non-GAAP operating income $ 179,794 $ 177,461 $ 83,484 Non-GAAP operating income by segment: Memory Solutions $ 73,639 $ 78,869 $ 19,530 Intelligent Platform Solutions 110,975 49,450 29,658 LED Solutions (4,820) 49,142 34,296 Total non-GAAP operating income by segment $ 179,794 $ 177,461 $ 83,484 Memory Solutions operating income decreased by $5.2 million, or 6.6%, in 2023 compared to the prior year primarily due to lower sales, partially offset by a favorable product mix and lower personnel-related costs driven in part by cost containment actions.
However, our reliance on third-party manufacturers exposes us to risk of supply chain disruption and lost business. For example, the current global semiconductor shortage has adversely affected our operating results.
For example, the current global semiconductor shortage has adversely affected our operating results. In addition, the recent high demand for, and limited supply of, AI components globally, is affecting our sourcing of these components.
With the funds from the Amended Credit Facility, we paid a cash purchase price of $225 million for the Stratus acquisition and also repaid in full the $101.8 million outstanding under the Earnout Note. For more information, see “Item 8.
In addition, we amended certain covenants under the amended credit agreement. In the first quarter of 2023, we applied a portion of the proceeds of the incremental term loans to (i) finance a portion of the purchase price of the acquisition of Stratus Technologies and (ii) pay in full the $101.8 million outstanding under the LED Earnout Note.
The increases in accounts payable and accrued expenses and in inventories were primarily due to the transition of manufacturing from contract manufacturers to the Company as well as higher purchases for certain programs. The increase in accounts receivable was primarily due to timing of sales.
The decreases in both accounts payable and accrued expenses and inventories were primarily due to lower inventories in our Memory Solutions and IPS businesses. The decrease in accounts receivable was primarily due to lower gross sales in our Memory Solutions businesses.
Removed
Overview For an overview of our business, including a discussion of our acquisition of our LED Solutions business from Cree and effects on us of COVID-19, see “PART I – Item 1.
Added
At the closing, SGH paid a cash purchase price of $225 million, subject to certain adjustments.
Removed
Business – Overview.” As a result of our recent acquisitions and heightened focus on operational excellence over the past several years, we grew our net sales by 21% to $1.8 billion in 2022 compared to $1.5 billion in 2021.
Added
The Stratus Earnout is payable in cash, ordinary shares of SGH, or a mix of cash and SGH Shares, at SGH’s election. On June 28, 2023, we provided notice to the Stratus Seller of our election to settle the Stratus Earnout in cash.
Removed
Over the same period, our consolidated GAAP operating income was $114.5 million, $55.2 million and $41.3 million for 2022, 2021 and 2020, respectively. Our total non-GAAP segment operating income grew by 41.6% to $227.6 million, or 12.5% operating margin, in 2022, compared to $160.8 million, or 10.7% operating margin, in 2021.
Added
Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – Business Acquisitions – Stratus Technologies.” Divestiture of SMART Brazil On June 13, 2023, we entered into an agreement to sell an 81% interest in SMART Modular Technologies Brasil – Indústria e Comercio de Componentes Ltda. (“SMART Brazil”) to Lexar Europe B.V., an affiliate of Shenzhen Longsys Electronics Co.
Removed
See “Non-GAAP Measures of Segment Operating Income” below for further details. Our operating expenses have grown in recent periods as we drive innovation, expand our products and services portfolio and invest in greater operational capabilities to support our growth.
Added
Ltd. for approximately $205 million. The transaction is expected to close at the end of calendar year 2023 or beginning of calendar year 2024, subject to required regulatory approvals and satisfaction of customary closing conditions. SMART Brazil operates as a stand-alone business which assembles and tests modules for electronics manufacturers that sell devices to Brazilian consumers.
Removed
Our total operating expenses grew in 2022, primarily as a result of a full year of operating expenses for the LED Solutions business. We expect to continue to see increased operating expenses in 2023 as we record operating expenses for our Stratus acquisition and continue to increase our investment in new products and services for the IPS business.

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Market Risk — interest-rate, FX, commodity exposure

4 edited+4 added−2 removed6 unchanged
Biggest changeIn addition, we have certain costs that are denominated in foreign currencies, and decreases in the value of the U.S. dollar could result in increases in such costs, which could have a material adverse effect on our results of operations. 55 As a result of our international operations, we generate a portion of our net sales and incur a portion of our expenses in currencies other than the U.S. dollar, particularly the Brazilian real.
Biggest changeIn addition, we have certain costs that are denominated in foreign currencies and decreases in the value of the U.S. dollar could result in increases in such costs, which could have a material adverse effect on our results of operations.
Assuming that we would satisfy the financial covenants required to borrow and that the amounts available under the 2027 Revolver were fully drawn, a 1.0% increase in interest rates would result in an increase in annual interest expense and a decrease in our cash flows of $6.3 million per year. 56
Assuming that we would satisfy the financial covenants required to borrow and that the amounts available under the 2027 Revolver were fully drawn, a 1.0% increase in interest rates would result in an increase in annual interest expense and a decrease in our cash flows of $8.0 million per year.
Based on our monetary assets and liabilities denominated in foreign currencies as of August 26, 2022 and August 27, 2021, we estimate that a 10% adverse change in exchange rates versus the U.S. dollar would result in losses recorded in non-operating expense of $5.8 million and $7.0 million, respectively, to revalue these assets and liabilities.
Based on our monetary assets and liabilities denominated in foreign currencies as of August 25, 2023 and August 26, 2022, we estimate that a 10% adverse change in exchange rates versus the U.S. dollar would result in losses recorded in non-operating expense of $1.6 million and $1.2 million, respectively, to revalue these assets and liabilities.
Interest Rate Risk We are subject to interest rate risk in connection with our variable-rate debt. As of August 26, 2022, we had $273.3 million outstanding under the 2027 TLA and $101.8 million outstanding for the Earnout Note. In addition, our Credit Agreement provides for borrowings of up to $250.0 million under the 2027 Revolver.
Interest Rate Risk We are subject to interest rate risk in connection with our variable-rate debt. As of August 25, 2023, we had $551.6 million outstanding under the 2027 TLA. In addition, our Amended Credit Agreement provides for borrowings of up to $250.0 million under the 2027 Revolver.
Removed
As a result, changes in foreign currency exchange rates impact our reported results. Approximately 23%, 30% and 35% of our net sales in 2022, 2021 and 2020, respectively, originated in Brazilian real. We utilize foreign exchange forward contracts to mitigate foreign currency exchange rate risk associated with foreign currency-denominated liabilities in Brazil, primarily third party payables.
Added
As a result of our international operations, we generate a portion of our net sales and incur a portion of our expenses in currencies other than the U.S. dollar, such as the Japanese Yen, Malaysian Ringgit and Chinese Renminbi.
Removed
We do not use foreign currency contracts for speculative or trading purposes.
Added
As a result, changes in foreign currency exchange rates impact our reported results.
Added
We had cash, cash equivalents and investments of $390.8 million as of August 25, 2023. We maintain our cash and cash equivalents in deposit accounts, money market funds with various financial institutions and in short-duration fixed income securities.
Added
Due to the short-term nature of these instruments, we believe that we do not have any material exposure to changes in the fair value of these investments as a result of changes in interest rates. Increases or declines in interest rates would be expected to augment or reduce future interest income by an insignificant amount. 60

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